Staying power

Reliant Energy's 340-megawatt peaking plant in Shelby County, Ill., USA, consisting of eight natural gas turbines, was a fast-track project meant to meet increasing demand for electricity by consumers in the Midwestern United States

Reliant Energy's 340-megawatt peaking plant in Shelby County, Ill., USA, consisting of eight natural gas turbines, was a fast-track project meant to meet increasing demand for electricity by consumers in the Midwestern United States.





With energy markets opening globally, companies can substantially increase their earnings growth by developing new power plants—and project managers are their facilitators.

Reliant Energy, for instance, transformed itself over five years from being a regulated company in Houston, Texas, USA, to a well-diversified energy services company operating in North America and Western Europe. In 1997, the company had no unregulated power generation. Today it has more than 17,000 megawatts and is the second largest owner of unregulated power generation in the United States—a move that is expected to increase earnings about 12 percent annually.



PSEG Global has made Poland a target market for business development in Europe. The firm is constructing a combined heat and power plant (above) in Chorzow, Upper Silesia, Poland, approximately 50 miles west of Skawina, Poland, where the firm purchased a 35 percent interest in the 590-megawatt electric and 618-megawatt thermal coal-fired combined heat and power plant (right, top and bottom).


Unlike a regulated environment where company returns are limited but expenses are passed to rate-payers, a competitive setting has no such certainty. Potential returns associated with the construction of new facilities must be commensurate with the risks. Under deregulation, the goal is to increase earnings by at least 10 percent annually compared to the two percent growth rates previously.

In the United States and Europe, companies are buying or developing plants to support their trading and marketing activities. Essentially, traders scout markets and report to management where opportunities exist. The estimated demand for 69,000 megawatts of additional capacity in Europe, for instance, has compelled powerhouses such as American Electric Power and Utilicorp to construct or purchase assets to support trading operations. Similarly, electricity usage in the United States is expected to increase about 3 percent over the next 20 years, leading President George W. Bush's administration to conclude that roughly 650,000 megawatts of added capacity is needed.

Demanding Prospects

Electric utilities have rushed to meet the overall demand. Since 1992, 122 projects have been constructed or started worldwide, says Thomson Financial, New York, N.Y., USA. Meanwhile, the total debt issued by unregulated merchant energy companies has climbed from more than $23 billion in 1999 to nearly $49 billion in 2001.

Once a need is determined, permitting and development is a multi-tiered project—one that can take about four years. Electricity must be transported through electrical wires, which also must win government approval. Long before the process is complete, buyers for the power must be lined up—all to limit utilities' exposure.

“It's a complex web,” says Bob Bellemare, vice president of utility services for Scientech, an energy consulting firm in Albuquerque, N.M., USA. “Fifty percent or more of all projects might not see the light of day. To succeed, project managers must have done their homework and work diligently to usher deals through the entire process.”

With so much money at stake, project management must be well-honed. Toward that end, Reliant Energy's power facility in Shelby County, Ill., USA, negotiated all permits by February 2000. With the gas turbines on hand, construction began soon afterward with 450 laborers working two shifts, six days a week. The plant began commercial operation the following July.

It only took 129 days to build. The company wooed such interests as environmentalists and politicians, who helped champion the cause.

Assessing Risks

As companies assess their scopes and strategies, they are simultaneously evaluating the probability of their risks. If power plants are needed, utilities then must estimate their exposure. Specifically, they are concerned with whether they will have access to affordable fuel and whether they will have firm contracts to satisfy the banks that may finance them.



At C$410 million, the Southern Crossing pipeline project, a 300-kilometer, 24-inch transmission pipeline from Yahk in the East Kootenays, British Columbia, Canada, to Oliver in South Okanagan, British Columbia, Canada, is the largest capital project in BC Gas history.


Intense competition has meant there is more attention paid to the tools and methodologies needed to control risks.


“Intense competition has meant there is more attention paid to the tools and methodologies needed to control risks,” says Art Kanzaki, assistant project director for the Southern Crossing Pipeline Project with BC Gas Utility in Vancouver, BC, Canada. “The project processes for power plant site development projects are similar to linear gas pipeline projects. The detailed engineering, procurement and construction phase is a relatively short part of the project cycle in either case.”

Risk management is critical. Without proper due diligence that includes a number of “what-if” scenarios, utilities' credit quality would be harmed. Without investment-grade bonds, companies would find it cost-prohibitive to finance their debt. The scrutiny has intensified as agencies now evaluate more closely the creditworthiness of the utilities' customers.

In each case, companies appraise the probability that those risks actually will occur. They may not choose to go forward if dangers persist or if the cost of failure is prohibitive. If they have properly considered the perils and have planned accordingly to minimize them and their affect, they will likely proceed.

“We begin with an end in mind,” says Hyde Griffith, a business developer for Duke Engineering and Services in Houston, Texas, USA. “We develop a scope and a strategy around that. We gain by having an integrated approach and using the same people each time, which increases our efficiencies and mitigates many risks.”

It's a tactic used by the biggest generators in the world. Atlanta, Ga., USA-based Southern Co., for example, has begun work on a 633-megawatt plant expected to be completed by fall 2003. As a partner, the Orlando Utilities Commission will own a third of the plant and is buying the power along with two other entities under a 10-year contract. Orlando chose Southern Co. Generation and Energy Marketing over other bidders because it had competitive prices and because it has a record of reliability, says Paul Bowers, president of the unregulated generation arm of Southern Co.

“When we go into a contract, we will deliver a unit on a certain date,” says Bowers. “We map out the risks and how we will manage them to ensure completion. Each increment of the time line is met. We check it and have monthly staff reports to ensure that we deliver on time and on budget. Our record is absolutely on target—and a selling point for us.”

The company's bilateral contracts ensure that buyers are lined up in advance. It's also the way Parsippany, N.J., USA-based PSEG Global operates. PSEG Global earned financing in October 2000 and began the construction of a 220-megawatt plant in Chorzow, Poland, a month later. The facility, which will use state-of-the art technology that replaces an existing plant, will operate under 20-year purchase contracts and come on line in 2003.

Similarly, the company announced in January that it completed negotiations to buy a 35 percent stake in a 590-megawatt coal-fired plant in Skawina, Poland—a share that will jump to 75 percent over time. It's secured by yearly contracts. Both sales are part of the Polish government's energy privatization program.

PSEG won those deals after approaching the local plants and convincing them that new and more efficient generation was needed. It's an effective pitch, given that Poland is seeking to enter the European Union, which has implemented some strict environmental rules to coincide with the opening of markets there over the next few years.

“We have gotten involved in Poland because it provides regulatory confidence—a prerequisite for private investors,” says Nelson Garcez, managing director PSEG Global's European operations. “We don't foresee anything going wrong. All of the studies show that Poland is the most prepared country in Eastern Europe to join the European Union.”

Long-Term Trends

To be sure, the current economic environment has quelled enthusiasm for new power facilities. Utilities are scaling back their plans to build new plants, in large part because wholesale electricity prices have dropped and because the capital markets are skeptical of companies increasing their debt levels.

While many construction projects are announced but never completed, Energy Insight, a Colorado, USA-based research unit of McGraw-Hill Cos., says 18 percent of all proposed deals were shut down in 2001—double that of 2000. In other words, more than 91,000 megawatts of the nearly 504,000 megawatts announced have been dropped or delayed. For instance, Mirant Corp., an Atlanta, Ga., USA-based global energy company, said in December that it would complete about 5,700 megawatts of power currently under way in North America, but that it would cancel or defer about 8,300 megawatts in projects that it had previously made public.

The doldrums that have beset the industry, particularly since Houston, Texas, USA-based Enron's collapse, are not expected to last. The decline in construction will cause supplies in many regions to once again become tight in the next two to five years, says Scientech's Bellemare. New plants are thus critical, he says, particularly because existing plants are aging.


We have gotten involved in Poland because it provides regulatory confidence—a prerequisite for private investors.



It's San Jose, Calif., USA-based Calpine's Corp's rationale for plowing ahead, despite the lull. The power firm is expanding its generating fleet from 12,000 megawatts today to 70,000 megawatts by 2005.

Opportunities exist but risk analysis must be performed. If financial and regulatory threats are assessed and mitigated, then utilities can still earn superior returns. Project managers will remain their primary engine for growth. PM

Ken Silverstein is an award-winning journalist who has been published in more than 100 periodicals. Much of his career has been spent as a writer, Washington D.C., USA-based bureau chief and editor for publisher Primedia.




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