With the U.S. expected to add more than 12 GW of installed capacity by the end of 2015, many wind developers will be starting construction of new wind farms throughout this year. Therefore, many wind developers will soon be mulling over how to approach new wind farm construction. There are two primary choices: Wind developers can either contract through a service provider through a balance-of-plant (BOP) agreement – under which the developers typically provide engineering expertise and/or materials to the job – or outsource construction entirely under an engineering, procurement and construction (EPC) arrangement.
Choosing the right construction services method depends on several factors, with cost being the most obvious. However, not in all cases. Sometimes, a developer may opt to have an engineering or design firm engineer the project and have a construction services provider build the wind farm to specification. At times, however, the decision goes beyond economics. A project may need to be energized by a certain date to qualify for a tax incentive or to meet the stipulations of a power purchase agreement (PPA). Therefore, meeting a deadline might outweigh the mere cost of a job. In other cases, availability of equipment, such as a crane, might be the most important determiner.
Chuck Mossman, vice president and general manager at Toronto-based construction services provider Henkels & McCoy Canada, says it is becoming a trend for more experienced wind developers to opt for a BOP arrangement. According to Mossman, the type of materials developers provide to the contractor could run the gamut from main power transformers to fiber-optic cabling, switches and junction boxes.
He says wind developers that procure such equipment for the contractor are likely to avoid mark-up costs, which can be significant. However, if something goes wrong – a faulty part, for example – the risk may fall to the developer, Mossman notes, explaining that some wind developers are cognizant this could happen and proceed anyway.
“Some of the big players have a comfort level assuming this level of risk,” he notes.
Conversely, Joel Schittone, director of engineering and development services at Madison, Wis.-based construction services provider IEA Renewable Energy, maintains that developers can still save money and time by going the EPC route.
“Wrapping engineering with procurement and construction can often be advantageous compared with having a separate engineering firm conduct the design and having a contractor retained solely for construction or procurement/construction of the facility,” he explains.
Formal site plans and specifications under the BOP model are typically prepared by the owner’s engineer and used as a basis for the BOP bid, notes Schittone. There are also times when the BOP contractor does not agree with a design approach or the use of specified equipment. Such issues can lead to additional cost and delays in the final design process, he says.
“Because construction documents prepared by the EPC contractor are tailored for their own use, plans are usually less formal than the construction documents prepared under the BOP model,” reasons Schittone. Therefore, an EPC arrangement can often shrink time schedules.
Schittone says that combining the design and build process into a single EPC contract just makes things easier.
“The EPC contractor is the single source of responsibility to be held accountable,” he says. “Having the design and build process separated under a BOP model can potentially lead to differences of interpretation of the design and potentially lead to further confusion.”
In wind farm construction, wind developers are
increasingly turning to a balance-of-plant arrangement.
Complicating matters is the tendency by some in the wind industry to use EPC and BOP interchangeably, explains Matt Gilhousen, chief development officer at Lenexa, Kan.-based TradeWind Energy.
“One might say they are going out for BOP pricing, but they have not yet engineered the project. Really, they are going out for an EPC contract.”
He says one way to keep the acronyms straight is to first determine which party is doing the engineering. Ostensibly, BOP is EPC without the engineering component, he notes.
Definitions aside, the larger issue comes down to money compared to risk – a fine line a project developer often straddles. Spending too little on a project could cause the project developer to overlook critical flaws that could cost millions down the road. Conversely, the developer’s bottom line could be negatively impacted if too many dollars are poured into development assets that never get past the finish line in a painstaking attempt to understand every last detail.
“As developers, we constantly ask ourselves how much money we should be spending to better understand our site in securing a PPA,” notes Gilhousen. Generally speaking, he says, the more dollars allocated toward a project, the better understood the risks.
Lately, TradeWind has taken to partnering with EPC providers relatively early in the process. Gilhousen says the rationale behind such an arrangement is simple: “The EPC provider has skin in the game, and we get to leverage the provider’s geotechnical and engineering skills and resources.”
So although TradeWind may give up the ability to run a competitive process to select the lowest bidder under a competitive BOP process, through an EPC partnership, it is able to leverage its development dollars and the contractor’s resources to better understand the project engineering, reduce project contingencies and lower project execution risk – all of which lead to overall lower construction costs and a higher level of success.
Above all, Gilhousen cautions, a developer must know and understand the details about a potential site.
“If you’re running a BOP process and your designs are preliminary, you could be in trouble,” Gilhousen explains. Often, he says, developers may only have a general idea about project specifics when they go out for construction estimates. “Maybe you’ve done a little soil sampling on-site or dug a few holes,” he says. Invariably, he adds, what happens is that costs are going to exceed what developers thought.
“If your designs aren’t finalized, things are bound to change.”
For his part, Gilhousen maintains that a competitive BOP process works well only when “you have the luxury of time to hire an engineer to fully engineer the project prior to putting out to BOP contractors for bids.” He adds that “EPC can greatly reduce the timeline and still lead to competitive pricing.” w
Marketplace: Construction & Engineering
The Alphabet Soup Of Construction Acronyms
By Mark Del Franco
The proper method for building a new wind farm depends on many factors, such as industry experience and a tolerance for risk.
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