South africa mulls EPCs as big CSP builds loom
To EPC or not to EPC, is a question arising more frequently these days in South Africa’s big contrac
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Perhaps the practice of engineering, procurement and construction is not yet as big an issue in South Africa as it is in more developed countries, but it seems likely that it won’t be long before it becomes routine for larger contracts. Much will depend on how such contracts are structured, and on whether or not project owners would be willing to pay the hefty premium for the peace of mind such an arrangement brings.
“EPC as a contracting arrangement is gaining in acceptance in developed construction industries in which the contractor designs the installation, procures the materials and undertakes the construction either himself or by subcontracting part of the work,” explains Rowan Goeller, director of investments and concessions at Group Five in South Africa. Where project finance is the preferred financing structure and banks and other funders are involved EPC is becoming a preferred route.
“It’s an onerous process,” says Goeller. “and you have a number of issues to be aware of, such as liquidated damages for both performance and delay according to the set timetable. The EPC contractor is actually liable for the full amount of the contract having given a completion guarantee to a certain performance standard.”
The contract owner will pay a premium that could add 5% to 10% to the project cost but he will most likely accept it is worth the peace of mind it buys.
“EPC contracting requires rigorous legal documentation to define the range and scope of the project,” says Goeller. “The contractor will carry the project risk for schedule as well as budget in return for a fixed price. As a project sponsor and lender you are paying a premium for the peace of mind.”
Divesting risk
Some criticism has met the sometimes steep EPC premium contract owners must pay, but they hold less water when considering how much of the risk is transferred to the contractor.
“The owner puts in minimum efforts for his project and so has less stress. EPC gives the owner one point contact. It is easy to monitor and coordinate, it ensures quality and reduces practical issues faced in other ways”, explains Goeller, spelling out some of the reasons why the EPC way of executing a project is gaining importance worldwide.
The owner is not affected by the market rise and the investment figure is known at the start of the project. In an EPC contract, besides the plant siting, the owner will define the scope and the specifications of the plant, the quality, cost and project duration.”
As South Africa takes its first steps in establishing a concentrated solar power (CSP) sector with a 50MW tower installation and 100MW parabolic trough facility both in the sun-drenched Northern Cape Province, the observation is doing the rounds that a fully wrapped lump sum EPC contract is more suited to CSP than either wind or solar PV electricity generating projects.
“That certainly seems to be the case,” Goeller tells CSP Today. “CSP plants are not modular like wind or PV, and are more difficult to break up into discrete packages with defined interfaces. Therefore it is more suited to a fully wrapped EPC solution, which tends to keep the funders happier.”
Lucrative market for EPCs
Goeller contends that South Africa is capable of taking up contracts of the scope and size of the CSP installations scheduled to get under way in the Northern Cape in June this year, but “we would have to build up to a bigger industry capability”.
There are four or five big construction companies capable of taking up EPC contracts of that size, but their capacity is likely to be used up quite quickly, says Goeller. “We are seeing quite a few international EPC and construction companies coming in and partnering with local contractors”.
EPC contracting would be favoured by independent power producers, which is a new but growing sector in South Africa. The state energy company, Eskom, for example, doesn’t use EPC contractors when they build their coal-fired power stations. They like to break the contract up into many different pieces and hand out individual contracts. Hence there has been little requirement for EPC type contracts in the power sector up to now.
Concentrated solar power, although a relatively recent innovation in the electricity generating ethos, is tried, tested and operating successfully in the United States and Spain. On one hand it is new enough to cause moments of discomfort and hesitation with funders still unsure of the process.
On the other, the contractor, Abengoa of Spain and the South African government through its development finance arm, Industrial Development Corporation, have seen enough for them to discount the risk and underwrite the inception of CSP on the African continent.
Private capital will watch the progress of South Africa’s CSP installations with interest.
To respond to this article, please write to the Editor:
Rikki Stancich: rstancich@csptoday.com