A new report researched by Bloomberg New Energy Finance (BNEF) and commissioned by CohnReznick finds that with U.S. renewable energy capacity (excluding hydropower) expected to double by 2021, firms providing engineering, procurement, and construction (EPC) services for solar and wind projects will need to adapt to the economic realities of a changing industry. Faced with a scarcity of large utility-scale projects and shrinking profit margins, the largest firms will need to look at new opportunities or change their business models to avoid disappointing returns.
“To stand out, EPC firms must offer credibility and financial stability,” says Tim Kemper, co-national director of CohnReznick’s Renewable Energy Industry Practice. “As the renewable energy industry continues to develop and grow, it is clear that the EPC sector will become a more critical element of the financing aspect of projects. At CohnReznick we saw an opportunity to review and analyze this segment of the industry and share the findings.”
Key Findings
- Some EPC firms that have historically focused on wind are broadening their attention to solar, which offers a more stable policy environment. Firms that can focus on smaller utility-scale solar projects (1-10 MW) in states with robust incentives may find higher margins than might be gained from large-scale wind.
- Key EPCs with significant experience as general contractors have now also developed deep expertise in U.S. renewable energy, providing their clients with knowledge of financing obstacles, development trends and technology advancements. They are also becoming involved in areas such as permitting and securing the point of interconnection. Some EPC firms are offering their clients financing or alternative payment methods to help get projects completed.
- EPC firms are beginning to look to other ‘adjacent’ technologies, such as advanced storage.
- EPC costs have been falling as the increased scale and maturity of the U.S. solar and wind industries are, for the most part, driving total project costs down. In some regions, competition with the oil and gas sector for resources is reversing this trend.
“From afar, the various firms that provide these services might appear to be indistinguishable,” says Michel Di Capua, head of analysis in the Americas, for BNEF. “But some firms have carved specialized niches or developed impressive track records. In an environment in which the easy projects have been done and incentives are expiring, differentiation and know-how matter more than ever.”
The report also looks at the economics of providing EPC services. Estimated EPC prices (including component costs but excluding development costs) for photovoltaic solar projects range from $1.38/W for very large desert-based projects using thin-film modules, to $1.97/W for projects around 5 MW in size in New Jersey. Labor is the most important variable cost. For wind, EPC costs (including balance of plant costs but excluding costs of turbines) range from $0.41/W in Oklahoma to $0.62/W in New England.
The market for EPC services for utility-scale solar and wind is forecasted to peak at $7.2 billion in 2015 before falling 28% to $5.2 billion in 2016 and another 52% to $2.5 billion in 2017, as a number of federal tax incentives effectively expire or decrease in those years.
“On the solar side, downward pressure on margins will likely continue as developers look to EPCs to absorb expected price increases caused by tariffs in Chinese panels,” says Jacqueline Lilinshtein, clean energy economics analyst at Bloomberg New Energy Finance. “On the wind side, competition with the gas industry for labor and basic commodities will add additional stress.”
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