The
time is ripe to realize the vision of a clean energy future. However, that
future comes with new risks. In the old era of vertical energy integration, a
few companies controlled the value chain—from crude oil to product retail. Major energy
companies owned the oil and gas in the ground and proprietary processing technologies,
exerting major influence over the regulatory process. They had a balance sheet
to pay for their projects, worked with their preferred engineering, procurement
and construction (EPC) firms and owned the retail organizations to distribute
products to consumers (FIG.
1).
The
new value chain is comprised of stakeholders that historically have never worked
together. Instead of crude oil, feedstocks are sourced from nature, agriculture
and waste management companies. Each process requires novel and adapted
technologies offered by different vendors with competing guarantees. Early economic
incentives exist via the U.S. Renewable Fuel Standard market program, low-carbon
fuel standard credits and U.S. Inflation Reduction Act; however, the regulatory
environment fluctuates. Developers with little experience in major complex
projects must now navigate financing challenges, conflicting EPC approaches and
entrenched product retailers (e.g., offtakers).
These
factors add up to a new project risk profile. Three areas are critical to
managing new project profile risks: project definition, technology selection and
stakeholder requirements.
Project
definition. Projects in
the new value chain must optimize three inputs in project definition: the business
model, the financing strategy and the viable technology. Aligning only two of
these inputs will not result in a successful project (FIG. 2).
First,
a sound business model must be established. In addition to balancing feedstock
and the product market, a proper business model requires favorable yield
structures, balanced operating costs and a realistic total installed cost. Concurrently,
the money must be available to pay for the project, whether it is debt, equity,
cash flow or a combination of all three (FIG. 3).
Technology
selection. The project
definition will drive technology selection, and the chosen technology path will
impact carbon intensity. Many competing technologies may meet the same project goals.
For example, at least four competing hydroprocessing-based technologies produce
renewable diesel from vegetable oils and animal fats, and there are at least
three feed pre-treatment options.
As
with anything untried, novel technologies introduce risk; however, with risk comes
the potential for reward. Conducting detailed due diligence, taking the time to
understand the technology and negotiating guarantees will mitigate some of this
risk.
Stakeholder
requirements. Today’s
sustainable projects have new stakeholders—financial institutions, project developers and startups—that may have never
executed a complex project. These stakeholders may lack a nuanced knowledge of
technology, schedule or escalating costs, which means risk. With risk comes the
need for guarantees from the technology provider and EPC firms. These can be guaranteed
lump sum pricing or an overall financial and technical wrap. This passes risk
on to the EPCs, which are not always willing to accept the risk; other
stakeholders, including banks and owners, may have to contribute more equity.
Stakeholders
must understand the importance of efficient execution and achievable schedules in
meeting deadline-critical government incentives. The historical project scheme
may not be acceptable in today’s world, where time to market is critical.
Compressed engineering schedules can shorten the engineering time and help identify
long lead equipment early in the design engineering phase. A fast-track project
will require overlap in the front-end loading (FEL)-2 and FEL-3 phases and
detailed design and construction.
Takeaway. Overall, energy transition projects
have a fragmented value chain, competing and new stakeholders, and a complex
technology selection process. Project risk can be reduced and return on
investment maximized with accurate project definition, compressed
delivery schedules and expert management.
Two
essential factors drive energy transition projects:
MICKEY
REEVES began his 40-yr
career working in U.S. refineries, where he held positions in engineering,
planning and economics, operations planning, operations supervision and health,
safety and environmental. He transitioned into consulting and engineering in
mid-career, working on refining projects in South America, Canada, the U.S. and
the Middle East. A significant part of Reeves's career was spent with Jacobs
Engineering, where he worked as a Lead Process Engineer, Consultant, Process Engineering
Department Manager, and Vice President of refining and petrochemicals – Middle
East. In his final role at Jacobs, he was Managing Director of Jacobs
Consultancy. Reeves earned a BS degree in chemical engineering from the West
Virginia Institute of Technology and an MS degree in chemical engineering from
the University of Houston.
REBECCA
BORGH is the Marketing
Director for TritenIAG. She is a strategic branding expert, designer and editor
who helps brands modernize their image, launch sustainable projects and bring
products to life.
CHRISTINE PORTILLO is a writer, editor and communications professional specializing in content creation and management, interactive marketing and social media. She has a strong background in engineering and technical communications for global audiences; hardware and software end-user documentation; proposal and corporate style guide development; and newspaper journalism. An English major and language lover, Portillo is committed to telling a crisp, clear and compelling story.