Cross-industry Project Management Practices

Growth in power generation from renewable energy sources is being driven by climate change concerns and the resulting public agenda. With the United States importing around 60 percent of the oil it consumes, energy independence is also a potent force driving the need for homegrown sustainable energy. However, with the current uncertainty around future energy policy-including the failure of the Copenhagen Climate Summit at the end of 2009 and slim chances of a major Obama Energy Bill passing through Congress-the rapid growth of and positive sentiment for renewable energy has suffered some setbacks. Some industry observers have even started to talk about a “green energy bubble.”

There is no doubt that renewable energy generation will be part of the future energy supply mix. In United States alone, around 750,000 MW of renewable energy capacity from solar, wind and biomass sources is expected to come online from 2011 to 2016. Also, a large number of players are entering the renewable energy generation market with varying levels of investments and prior experience.

For example, in the United States, more than 550 companies are involved in 1,300-plus wind energy projects under various stages of development and around 290 companies are involved in 540-plus solar energy projects (refer to Figure 1). However, the speed of renewable energy adoption and its ultimate market share will largely depend on its economic viability; subsidies and indirect factors, such as carbon costs, will not be sufficient to drive growth in the long term.

Figure 1a: Wind Energy Project Timeline

With no fuel costs and relatively low operations and maintenance (O&M) costs, upfront capital costs have the single greatest impact on the profitability of renewable power generation. For example, initial capital costs for a solar photovoltaic (PV) plant exceed all other lifecycle costs by roughly a factor of three to five. As a result, the ability to manage new construction projects on budget and on time is a critical factor in determining the cost competitiveness of renewable energy. In particular, the ability to manage the technology supply market and source generation capacity at the lowest total cost of ownership is becoming a key differentiator.

Figure 1b: Solar Energy Project Pipeline

Given these facts, a valid question is whether the renewable energy industry can learn and apply leading practices from other capital intensive industries that have a long track record in successfully delivering complex projects and dealing with complex supply markets.

Why Capital and Project Management Matter

There is a significant upfront capital cost of building renewable energy power projects. A recent analysis of capital costs of 20 generating technologies indicated that solar thermal, photovoltaic, biomass and offshore wind are the most expensive generating technologies in terms of capital costs per kilowatt (refer to Figure 2).

Figure 2: Relative Capital Costs ($/kW) of Generation Technologies

Capital costs have a significant impact on the lifecycle economics of a plant. For example, in the case of a solar PV plant, an increase in capacity costs (after adjusting for tax credit) of 25 percent from $3,000/kW to $3,750/kW translates into an equivalent of additional costs of 2.3 cents per kWh or an increase of total generation costs by roughly 200 percent. Given that the O&M costs for renewable energy projects such as solar are fairly minimal compared to capacity costs (estimated at around $25/kW; 0.9 cents per kWh), it is impossible to recover from the increased lifecycle costs by better managing O&M costs.

Similarly, for onshore wind power plants an increase in capacity costs by 25 percent from $2,000/kW to $2,500/kW translates into an additional cost of 1.7 cents per kWh or an increase of total generation costs by roughly 180 percent. Finally, for biomass power, a 25 percent increase in capacity costs from $3,500/kW to $4,375/kW would increase generation costs by 1.1 cents per kWh. Figure 3 shows the impact of changing capital costs per kilowatt for different renewable technologies.

Figure 3: Impact of Changes in Capital Costs on Renewable Energy Lifecycle Economics

Besides construction budget performance, schedule performance is critical to the business case of new renewable energy capacity. While some smaller installations of solar and wind capacity can be up and running in less than a year, bigger project installations, as well as technologies such as biomass, require construction periods that could span two to four years. In such cases, adding or cutting a year from the construction timeline can have a significant impact on lifecycle costs.

For example, for an 80 MW biomass power plant with a four-year construction timeline, adding one or one-and-a-half years to the construction timeline is projected to add 0.3 to 0.5 cents per kWh to overall lifecycle costs. Figure 4 shows the impact of variation in construction timeline for a large biomass power plant.

Figure 4: Impact of Changes in Construction Duration on Biomass Power Lifecycle Economics

Given that many renewable energy technologies are still evolving, learning curve effects and continued technological advances will reduce capital costs over time. However, adopting leading capital management practices can both accelerate and de-risk the improvement trajectory.

Differentiating Factors

The topic of capital project management is not new, as several studies across multiple industries have examined the typical reasons for cost and schedule overruns. While less controllable factors such as regulatory-driven changes and delays, licensing challenges and rising commodity prices are often cited, controllable factors, including project management and cost estimation, are also frequently acknowledged to be significant factors. Our perspective, however, is that the root causes are often both more structural and more controllable.

Our recent cross-industry study of capital project excellence and associated leading practices offers some insights into the root causes of poor capital project execution and the ways in which leading public and private sector organizations are addressing these issues. The study findings are based on surveying executives and project managers from over 60 companies across a variety of capital intensive industries. Study participants shared practices along 11 key dimensions of performance as outlined in Figure 5.

Figure 5: Excellence in Capital Project Study Dimensions

Our findings suggest that key drivers of project performance fall broadly into three categories: scope definition, cost estimation and project execution.

  • Scope definition and project strategy activities play the most significant role in ultimately determining the success of project execution and can also be critical to successful start-up of operations upon project completion. In an environment in which poor project performance can impair the lifecycle economics of new renewable energy generation, coupled with ongoing increases in project and technology complexity up-front planning and strategic issues can only grow in importance.
  • Cost and schedule estimation has historically been one of the most challenging areas for large generation capital projects, regardless of technology. Historical construction cost reporting is often unreliable, and increasingly irrelevant, given the accelerating pace of change in renewable energy generation technology.
  • Problems in project execution can be mitigated to a large extent through proper planning, yet scope changes and unforeseen events are inevitable. In particular, an expected future shortage of experienced and skilled construction talent in the United States (in both engineering and skilled trades) presents a significant risk in project execution.

Figure 6 highlights some of the key drivers of performance in these areas.

Figure 6: Capital Project Performance Analysis Framework

Our research indicates that leaders in capital program management (across all capital intensive industries) are able to outperform the others on a sustainable basis by systematically employing seven key differentiating practices:

  1. Adopting a portfolio view to capital program management: Planning capital strategy over a multi-year year horizon with a rolling (that is, continually updated) process. This allows for better response to changing market conditions, better aligns capital project management processes with the organization’s strategy (based on financial and non-financial criteria) and facilitates cost containment strategies such as developing longer-term relationships with strategic suppliers and embedding complexity management in design practices.
  2. Creating integrated teams instead of operating in functional silos: Migrating from traditional functional silos within capital project organizations to utilizing cross-functional teaming will optimize installation, operation and maintenance. Of particular importance in new generation capacity construction is ensuring sufficient, early involvement of the operations team.
  3. Attracting, developing and retaining required skills and capabilities: Planning resource continuity to manage scarce personnel on long-term projects and project portfolios. A particular challenge across all capital-intensive industries in North America has been developing suitable career ladders for the most capable and ambitious technical staff. Lessons can be learned from other countries (for example, Germany and Japan) that place an extremely high value on “execution excellence” being the foundation of “business excellence.”
  4. Optimizing around cost rather than schedule: Understanding the trade-offs between cost and schedule and utilizing flexibility where available to take advantage of market conditions. Lessons can be learned from recent behaviors in the oil and gas industry, where the peak in commodity prices in 2007 to 2008 drove many companies to execute projects “at any cost” based on schedule considerations alone only to be faced with a multitude of non-productive and/or uneconomic capital when commodity prices receded at the onset of the recent recession.
  5. Managing complexity: Using standard/modular specifications and rigorous interoperability checks. Leading companies are resisting the urge to over-engineer what works well and are aggressively leveraging functional, effective designs time after time. In addition, construction complexity can be reduced by adopting modular design concepts that limit both the activity and workforce required at the operating site during construction.
  6. Realizing leverage through thoughtful procurement practices: Employing risk-based contracting strategies and unbundling of spend to create leverage with narrow supply bases, manage cost and guard against escalation. Strategic, long-term relationships with key suppliers are a critical enabler of design troubleshooting and continuous improvement. Legacy “bid and buy” strategies have a high correlation with over-budget, late projects.
  7. Predictive modeling to estimate contingencies: Utilizing history and Monte Carlo simulations to estimate project budgets and establish contingencies. Poorer performing companies tend to use a single, consistent contingency value when preparing appropriation estimates; leaders understand that uncertainties vary project by project and apply contingency factors accordingly. This is particularly important for renewable energy generation given that initial capital costs represent a significant majority of total lifecycle costs.

The applicability of the seven differentiating leading practices across the three primary cost and schedule over-run root cause areas is shown in Figure 7. Not surprisingly, many of the most effective practices and strategies for managing capital project performance have a significant impact on the effectiveness of up-front planning (scoping) and strategy development.

Figure 7: Impact of Differentiating Capital Project Management Practices on Cost/Schedule Drivers

Implications for New Renewable Projects

The challenge for developers of renewable energy generation capacity is to learn and adopt the lessons that other industries and organizations are offering. Like other asset-intensive industries, these companies require well-executed large capital investments and operational excellence to realize their strategic objectives.

The lessons of capital project excellence are indeed transferrable and most of them can be readily applied to renewable energy construction, as shown in Figure 8.

Figure 8: Applicability of Differentiating Capital Project Management Practices to Renewable Energy Construction

Constructing the next wave of renewable energy capacity in North America will undoubtedly be a tall order. New technology, system complexity, increasing expectations for operating performance, and an expected shortage of experienced and skilled resources all present challenges and increase the risks of completing these projects on budget and on time.

In this environment, the case for improved project execution is compelling; as outlined in Figure 4, project developers that apply cross-industry leading project management practices can enjoy total lifecycle cost advantages that significantly outweigh any corresponding benefits from reducing O&M costs.

Fortunately, there are lessons to be learned from successes in large and complex projects outside the renewable energy industry. If project developers and key suppliers are able to successfully adopt these differentiating practices, the future economic viability of renewable energy generation can be enhanced significantly. If not, the economic justification for future investment likely will be difficult and it will be increasingly challenging to tackle America’s dependence on fossil fuels.

Kish Khemani and Neal Walters are partners and Patrick Haischer is a principal in the Utility and Energy practice at A.T. Kearney.

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