A Special Report by Engineering News-Record and Power Magazines
In response to the abrupt halt to nearly all construction in the microelectronics market, a contractor long successful in that industry recently polled professional staffers about prior work experience. He found a substantial number had done powerplant engineering or construction. The contractor now is considering how to crack the power market.
Success in power hinges on good estimating, proper attention to risk allocation, qualified people and cost and schedule controls, says Bob Milhiser. But the power division vice president of engineer-constructor Burns & Roe Enterprises Inc., Oradell, N.J., says new players must "understand the power businesswhat assets or qualities could they bring?" He advises looking for a niche where a newcomer can apply its strengths.
Experience in process-industry constructionpulp and paper, petrochemicals and fertilizeris good preparation to compete in powerplant construction, Milhiser notes. A contractor without process-industry experience could gain entrée by focusing more narrowly. A microelectronics-industry contractor, for example, might provide instrumentation and controls for powerplants.
"It looks like connecting wires," says Jeffrey M. Levy, president and COO of Norwalk, Conn.-based specialty contractor EMCOR Group Inc. "But its really about understanding the flow of the job." Many of the approximately 45 electrical and mechanical contractors that belong to the EMCOR group of companies serve the powerplant construction market, but their learning curve was costly. "The first time we do a power project in each of our companies, it is not as profitable as the next ones," he says. "Probably the most important thing is to recognize that you dont know what you dont know. You can understand the skills, read the drawings, but the flow of the work and construction sequence and access are crucial."
The backlog of gas-turbine orders has attracted more attention, but a similar shortage of experienced powerplant constructors has created an opportunity for industrial contractors, says Charles E. Crocker Jr., vice president of engineering and construction for Reliant Energy Wholesale Group, Houston. "Contractor availability has become a nightmare recently." Where once it was possible to get a constructor on board 24 months before a powerplants scheduled commercial-operation date, the time required has grown to a 30-month minimum, he says.
EXPERIENCE. Having an experienced powerplant engineer on the team is key, says Crocker. "Guys whove managed large projects can manage powerplant projects as long as engineering help is part of the team," he says.
A few years ago, a Reliant project was built by an engineer and constructor who "were not well known for powerplant projects," says Crocker. They did well enough on plant construction, but got into trouble in the startup phase. "The team didnt have the technical depth that we need," he says.
Last summer, Reliants 10-unit, 870-Mw merchant plant in Aurora, Ill., was completed on time by a team composed of Graycor Inc., Homewood, Ill.; Sachs Electric Co., Chesterfield, Mo.; and Chicago-based Sargent & Lundy LLC. "Graycor has a great reputation, just not on powerplants per se," says Crocker. "They have some people on the team who do have some powerplant experience." But S&Ls strong powerplant experience helped assure the teams success. Now, a joint venture of Graycor and Murphy Co. Mechanical Contractors & Engineers, St. Louis, will be teamed again with S&L for engineering and construction of Reliants 550-Mw, dry-cooled, combined-cycle Bighorn project in Primm, Nev.
"Its easier for a contractor who has built other [process] plants but hasnt built powerplants to get into the business than it is for engineers," says Crocker. "Its best if the contractor has powerplant experience." But a seasoned engineer is indispensable, he insists.
Anchorage-based VECO Corp. was launched into powerplant construction from a process-plant base. The engineering, procurement and construction contractors roots are in the refining and petrochemical market, but with the advent of cogeneration, VECO made the natural shift to power. Today, roughly 20% of the firms gross revenue is power-derived, says Geza T. Szabo, senior vice president of VECOs power sector.
VECOs target power market is primarily cogen, both simple- and combined-cycle units of less than 250 Mw, and includes waste-heat recovery plants and wood-waste boilers. "There continue to be great opportunities throughout North America," says Szabo. "The U.S. alone faces a 200,000-Mw power shortfall, an infrastructure deficit on the order of $135 billion, especially on the East Coast and in the deep South." .
|BOOMING Gas-fired generation continues market dominance. (Photo courtesy of Burns & Roe Enterprises Inc.)|
COAL COMES BACK. Last winters record-high gas prices won new respect for coal. "We are doing coal projects today of some type in 26 states," says Doug Riedel, director of marketing for the power division of Burns & McDonnell, Kansas City. Coal units, built in the 1960s and 70s and thought to be headed to retirement, have become "valuable assets," he says. But as gas prices have fallen again, the environmental advantages of gas-fired powerplants have kept gas turbines popular. "Hundreds of turbines have been purchased," Riedel says, "and unless something catastrophic happens, those turbines will be installed and there will be a need for design engineering."
Burns & McDonnells reality check is to ask whether the prospective client owns turbines. The turbine shortage is not quite as critical as it was six months ago, but it is still crucial to do business "with people who control turbines," Riedel says. Without turbine contracts in hand, prospective gas-fired powerplants may well remain prospective"bragawatts," in one wry industry phrase.
EMCORs Levy sees opportunity in the aging U.S. powerplant inventory. "Youve got some plants that are simply tired iron, and are not going to be the most efficient way to meet the countrys needs," he notes. Levy sees this especially in some small projects that fly under the radar screen of the big general or EPC contractors. "Central stations will give way to distributed and regional generation," he says.
SMALL IS BEAUTIFUL. College and university campuses offer many opportunities for small EPC projects. After doing a gas-turbine cogen study for the University of California at San Diego a few years ago, University Mechanical Co., a San Diego-based EMCOR unit, won the EPC contract for the 20-Mw plant, valued at more than $20 million. Californias power emergency "turned the plant into a brilliant investment," giving UCSD a strategic advantage, Levy says. And the project attracted the attention of other universities and colleges, leading to similar work for EMCOR. "College campuses tend to have increasingly growing energy needs, but we had no idea that this powerplant was going to take off so much," Levy says.
The need for essential infrastructure on the periphery of the powerplant construction market presents still other opportunities to qualified contractors. Dashiell Corp., a Houston-based subsidiary of Exelon Infrastructure Services, provides turnkey construction of switchyards, substations and short transmission lines interconnecting generation stations with the power grid.
Dashiell has built high-voltage substations for the Gulf Coast petrochemical industry, and gained work in independent power when private developers began developing inside-the-fence cogen projects at petrochemical plants.
Projects, typically switchyards rated from 138 kv to 500 kv, run between $5 million and $25 million, with open-book, negotiated, lump-sum contracts and schedules of 12 to 16 months, says Henry Jackson, Dashiells president. "They are all driven by tight time frames," with liquidated damages running between $5,000 and $25,000 per day, he adds.
Ownersusually independent power producers or utilitiesare looking for a single contact to take responsibility for the tie-in between the powerplant and the grid. "The trend is contracting with the IPP," says Jackson. Dashiell in turn may subcontract some work, but "we feel we get more value added if we do the entire package," he adds.
Dashiells technical focus calls for a sizable technical staff and a fleet of specialized equipment. With 2001 volume of about $120 million, the company has 60 to 70 people in its engineering group, about half of whom hold a professional engineers license. Company-owned bucket trucks, trenchers, backhoes and cranes serve about 25 crews in the southeast and southwest. "A [general] contractor would have a hard time doing this turnkey approach," says Jackson.
The economic slowdown doesnt dim Jacksons faith in the still-hot power market. "We think the market will continue to grow. It will mature in some places," he allows. "The southeast has a tremendous amount of activity at this moment," especially Mississippi and Alabama. "If you really have deregulation, theyre going to have to replace all these 50-year-old powerplants."
RISK TAKERS. Allocation of risk is the factor that will make or break a contractor, says VECOs Szabo. "Youve got to be very selective. You can lose your pants if you dont have proper contracts." Equipment manufacturers, such as GE or ABB, will accept responsibility for performance, but not for schedule. If the equipment malfunctions, "the EPC contractor can be left holding the bag for delays," Szabo says. "There are liquidated damages associated with nearly every project today. Thats the biggest concern."
Dan Zabilansky, senior vice president of Lockwood Greene, Charlotte, N.C., notes that liquidated damages for powerplant EPC contracts run from $50,000 to $80,000 per day, "so you better know what youre doing."
One pitfall for unwary EPC contractors is in the purchase order for power island equipment, says Al Knapp, senior vice president at Steamboat Springs, Colo.-based contractor TIC Holdings Inc. Manufacturers often provide boilerplate purchase orders signed by developers and then assigned to the EPC contractor, whose terms include a 90-day grace period after startup for necessary equipment modifications. "[Equipment makers] are in a learning environment as well," Knapp acknowledges. But the manufacturers liquidated damages, typically $400 per day, are not nearly as highly motivating as the contractors. The EPC contractor thus must pick up on the grace periods significance and be prepared to mitigate the risk in such contract language.
"Financial strength is a problem in our industry," says Chris Tye, senior vice president of project services for Duke/Fluor Daniel, Charlotte, N.C. The company seeks only full-service, turnkey contracts. "Most of our clients project- finance, and they need guarantees from us for schedule, performance and price," he says. "We can use the balance sheets of our parents [Duke Energy and Fluor Corp.] for those guarantees." Financial depth is "becoming a bigger and bigger issue," agrees Zabilansky. "The customer wants us to have the experience and financial wherewithal to back it up."
WORRIES. The tight labor market also haunts the industry. "A majority of people who have failed either have not been able to find qualified labor or have not gotten the expected productivity they put into their bid," says Riedel. The shortage includes professional staff, notes Bob Gould, vice president, power sales for Parsons Corp., Houston. "Our greatest challenge to success is finding enough qualified people with powerplant experience to form a core nucleus in the business," he says.
The sustained boom in powerplant construction, now three or four years old, has led to some worry about overbuilding. "We have been putting on a lot of generation," Riedel says, "but there is still a need for considerable base-load generation." He adds that 90% of plants being built today are either peaking or intermediate plants. "There has been no significant base-load construction in 20 years," Riedel notes. "As natural gas prices rise, base-load generationcoal, even nuclearmay become more attractive. And a few [base-load] coal plants would keep quite a few engineers out there busy."
But the return of coal could exacerbate labor shortages. Six months ago, TICs Knapp was afraid coal-fired power would "take over." Construction of a coal plant can take four to five times the manhours required for a comparably sized gas-fired plant, he notes. "The boiler has to be totally field-erected." Contrast that with a gas turbine, which is shipped on a skid and essentially needs only to be hooked up. Then add the coal-handling equipmentconveyors, rail-car unloading facilitiesand emission-control equipment, none of it required for a gas turbine. "Coal is a hard push," Knapp says, considering the state of the economy, lower gas prices and the emissions.
While the powerplant market remains strong, says Knapp, "were on the downhill side of this bubble. Projects coming on line in 2002 and 2003 could put us in an overcapacity situation, although transmission constraints could still create power shortages." He adds that the state of the economy since Sept. 11 "is a real concern to me." Powerplant construction today is hovering around 70% of TICs business. Knapp expects that to drop off "dramatically" after 2003.