Key Project Management Factors to Consider When Managing Renewable Energy Projects – Part 1
Posted July 20th, 2011
The growth in power generation projects from renewable energy sources is being driven by climate change concerns and the resulting public agenda. The United States currently imports around 60 percent of the oil it consumes, so energy independence is a potent force driving the need for homegrown sustainable energy.
Renewable energy generation will definitely play a large part in our future energy supply mix. In the 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. 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.
With no fuel costs and relatively low operations and maintenance (O&M) costs, upfront capital costs will 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. The ability to manage new construction projects on budget and on time will be 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.
The big 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 Management Matters
There is a significant upfront capital cost when 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.
Capital costs have a significant impact on the lifecycle economics of a plant. For example:
• For 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.
• For an onshore wind power plant 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.
• 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.
Schedule performance is also 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.
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.
