Powering the future. EY capital and infrastructure services for power and utilities organizations

Transcription

1 Powering the future EY capital and infrastructure services for power and utilities organizations

2 The pressure to perform Overspending and delays threaten performance The infrastructure iceberg Investment in the power sector will be more than US$7.2t 1 including investment on construction and the decommissioning of assets up to 2025 encompassing nuclear, conventional and renewable generation, transmission and distribution. This massive and urgent requirement for new infrastructure has been created by a perfect storm of factors including: 1. Environmental challenges: countries need to diversify their energy mix with low carbon technologies, the share of which is forecast to rise from 30% in 2014 to 46% by Population growth: the global population is forecast to grow to 9.2 billion by 2040, 3 mostly in non-oecd countries where an increasing, aspirational middle class is pushing up energy demand. 3. World GDP growth: GDP (in real terms) is forecast to grow to US$136.7t in 2040, an increase of 83% in In the past, we have seen a strong link between GDP growth and electricity demand. Infrastructure is vital to support the economies, communities and prosperity of the future, with serious consequences for world economic development should it fail to be developed. But large capital projects are increasingly challenging because of their size, scope and unprecedented complexity. Many of them are failing to fulfill their potential due to problems in financing, delivering the assets and managing them over the longer term to drive the best return on investment. Disruptive technology is changing how assets are built and operated, with projects requiring new capabilities that did not exist in a pre-digital era. Projects are also being executed at a time of reduced access to capital and increased need for transparency around risks. There is an urgent need for a fresh approach to secure the success of tomorrow s infrastructure. Power and utility organizations need smarter financing strategies, a holistic view of control and risk, and a joined-up approach to data and digital technology along with better collaboration, significant cultural shifts and the ability to import lessons from other industries. 35% or US$2b Average megaproject overspend 5 64% Percentage of P&U megaprojects that suffer delays 6 US$7.2t Estimated spending in the power sector US$2.7t estimated spending on the top 1,000 projects 8 Overspending and overruns on big infrastructure projects are a worldwide phenomenon and the gap between projections and performance can be significant. P&U executives have identified three key issues for the industry 9 : Financeability: Organizations struggle to structure financial and commercial deals, achieve an investment-grade credit rating and secure investment on acceptable terms. Deliverability: An EY benchmark study of the world s power and utility infrastructure megaprojects reveals they are, on average, delivered 35% over budget and two years behind schedule, which erodes the business case. Asset management: Infrastructure businesses often have poor asset information leading to suboptimal asset maintenance, operations and lost value. Underpinning these visible issues are a number of significant causes. The infrastructure iceberg illustrates the complex mix of internal factors that combine to create tough challenges for many infrastructure projects. Financeability "Uninvestible" credit rating Not focusing on commercial structure early enough Misaligned delivery model and execution strategy Inadequate understanding of project risks Deliverability Cost and schedule overruns Asset management Suboptimal return on investment Lack of asset information Lack of project performance insight Project not set up for delivery Immature project design 1 International Energy Agency World Energy Outlook 2016 New Policies scenario. 2 Ibid. 3 Ibid. 4 Oxford economics, Global Data Workstation, Spotlight on power and utility megaprojects formulas for success, EY, Ibid. 7 International Energy Agency World Energy Outlook 2016 New Policies scenario. 8 EY analysis, EY research. 2

3 Key questions for your business While every infrastructure project is unique, the goals remain the same: finishing safely, on time, on budget, and running the asset to achieve planned returns. Here are five key questions that decision-makers should be asking to give the best chance of achieving these goals as they plan, analyze, execute and operate utility assets. How can we be confident that our project sponsors have fully identified risks to the business case and project viability? With tough competition for scarce investment resources, projects that are seen to have lower costs and shorter construction periods may well look more attractive than costlier alternatives. This can lead project sponsors to produce dangerously inaccurate estimates. To avoid this, make sure you are applying leading practices: Are sponsors incentivized on the final delivery outcome of the project not just on the financial investment decision (FID)? Are sponsors supported by timely, insightful program reporting? Are de-biasing techniques for decision-making a part of the project approval process, providing independent insight from people who have no financial or political interest in the project outcome? Are assumptions independently tested and, if possible, benchmarked against similar projects? How can we be sure that the business case is sufficiently robust not just to get through FID, but to deliver on time and on budget? Optimism bias and inadequate risk assessment can lead P&U organizations to greenlight projects that cannot possibly deliver on their original business case and consume a large proportion of the capital budget in cost overruns. Does your business case stand up to exhaustive testing and rigorous challenge? Did you run a thorough, quantitative risk assessment encompassing all key factors that may affect the business case, e.g., regulation and policy; in-depth market studies; project modeling and scenario planning? Do you have a reliable method to confirm cost and schedule contingencies are consistent with design maturity and contracting approach? Have we made sufficient upfront investment to limit common problems that cause time and budget overruns? Your project is more likely to avoid overruns and stay on course if you invest time and effort in building the foundations of delivery structure in the pre-fid stage. But, for many reasons, P&U organizations don t always do this. Are you confident that you have: A fully tested execution plan, encompassing all capabilities needed for successful delivery? A mature design, limiting risk of late changes? Collaborative design platforms to support design integrity, constructability and efficiency in operations? A comprehensive delivery and contracting strategy? Early investment in strong project leadership and skills necessary for delivery? How can we apply key lessons from other successful complex projects? Organizations are often good at capturing operational lessons, where it is relatively straightforward to learn from one year to the next. But the learning cycle around large capital projects can be a decade or more individuals may only ever work on one large project in their lifetime, and it is unlikely that one person will see the whole process. Is your organization set up to learn the most important lessons and pass down knowledge from one project to another? Do you have a formal process to capture and share valuable lessons? When it comes to leading practice in the sector, do you know what good looks like? How can you be sure the approach to your project is aligned, consistent and in line with P&U industry leading practice? Do you have good current awareness of lessons from infrastructure projects outside P&U? How do we confirm all critical performance indicators (CPIs) are visible throughout project reporting? Major projects frequently operate in organizational silos, which obstructs effective integration and can cause big problems across the asset life cycle. However, recent advances in digital technology now enable P&U organizations to create a centrally available, virtual digital model of the asset around which the whole team can collaborate. Does your project have: A digitally connected, aggregated reporting system across all project performance areas that forecasts performance for each level of the project team? Required reporting of all CPIs across all contracts, with remedies for non-performance? Collaborative data-gathering tools that collect data in real time; dashboard reporting to turn this into insight visible to the entire project governance team? 3 4

4 Here s where EY can help To secure the best financing arrangements and deliver projects in line with the business case, it is vital to invest more in developing and aligning the foundations of delivery structure in the early phase of the project, when most of the cost drivers are being determined. Drawing on our deep sector experience, industry-leading methodologies and insight, we can help you to develop the right strategic approach, raise funding, control projects, manage quality and risk, enhance efficiency and accountability and build data management and digital capabilities. Here s how. EY has experience helping P&U organizations across the entire asset life cycle. Our unique data-rich and risk-informed process can help clients develop, procure, finance, construct, commission, operate, maintain and decommission assets to maximum value. EY decision-support tools are at the heart of how we can help P&U organizations. They all focus on providing actionable, timely insight for decision-making, and are geared to to appropriately structuring projects, and helping them deliver on budget, on time and ultimately deliver improved returns. Market studies Concept and pre-feasibility Concept Pre-feasibility Investment plan Market studies Development and planning Feasibility FEED Business case Permits and site license EY P&U asset life cycle Design and procure Delivery strategy Policy and regulation Bid invitation specification Evaluation Negotiation Construct and commission Owners scope of supply Prelims Program setup Detailed design Build Operate and maintain Test Commission Manage, repair and maintain Close and shut down Decommission and exit Procure Set up Decommission Close EY can add significant value to power and utility infrastructure projects across all key stages of the asset life cycle: 0 3 Concept and Construct and pre-feasibility commission 1 Feasibility 2 Design, and planning procure and set up 4 5 Decommission Operate and maintain and exit 5 6

5 EY supports the complete infrastructure life cycle Issue Concept and Feasibility Design, procure Construct Operate Decommission pre-feasibility and planning and set up and commission and maintain and exit Insufficient understanding of governing regulations, policy, national strategy and market conditions lead to inadequate assessment of project viability and risks. Projects stall or fail because they are not structured with the target investor market in mind from the outset. Insufficient investment in the design phase and delivery strategy before FID leads to delays at the procurement stage and design changes, delays and cost increases at the delivery phase. Poor risk and project management controls lead to quality assurance issues, cost overruns and schedule delays. Significant value leakage through over or under maintaining assets due to a lack of information affects sound asset intervention decisions. Managing the transition from revenue-generating plant to decommissioned cost center may lead to loss of value. Response Rigorous assessment of project options Stakeholder agreement and understanding around project goals and desired outcomes Thorough investigation of factors influencing the business case In-depth assessment of regional and country regulation and policy In-depth benchmarking, market studies, project modeling and scenario planning Target an investment-grade credit rating to bridge the gap between projects and institutional capital Align commercial structure to revenue stream View holistic design and asset performance, assessing the full range of issues influencing the business case Conduct in-depth project risk assessment Check that efficient distribution of risks and incentives are in place to manage them Clearly define end-to-end project delivery strategy Check alignment between project organization design, procurement strategy, commercial and operational capabilities Confirm that design is as mature as possible and consistent with commercial commitment, with all risks fully assessed and mitigated Build robust integrated data and design management system and capability Incorporate benchmark data for procurement evaluation Evaluate program controls and confirm they are properly structured Set up clear performance metrics embedding transparency of reporting to support leadership decisions and to keep projects on track Continuously build and assess best scenarios to meet cost and lead-times targets Define the information sets needed to make sound asset interventions decisions Capture good quality asset performance and condition data to facilitate accurate and timely intervention decision-making Develop asset intervention options and asset strategies Take a whole-life approach, encompassing end-of-life options, exit liabilities and decommissioning policy Leverage enhanced commercial discipline and operational methodology Outcome Selection of the top option. Clients are either enabled to mandate a project with greater certainty or stop working on a project if not viable. Projects are both financeable and deliverable, attracting investors on better terms. Alternatively, organization stops working on the project if appropriate. Project is optimally set up, with a mature design, integrated with all project management functions and operations capability. Projects have independent actionable and timely insight into performance and interventions where required. Improved allocation of capital and operating expenditure, delivering a greater ROI while balancing risk and performance levels. Decommissioning strategy and execution plan is optimally structured. Examples Provided market study in the Middle East to assess viability of a new technology power project Provided study and model in Europe to assess viability and business case for a small modular reactor Supported development of nuclear power model in Europe; served as basis for nuclear power regulatory guidelines Developed outline investment plan and appraisal for new power project in the Middle East Reviewed risk profile and approach for a P&U infrastructure project in the UK, resulting in investable credit rating Assessed project success leading to changes prebuild, confirmed aggregate risk profile and better infrastructure credit rating Strategic advisor for new nuclear build, providing organizational structure and integrated management system Supported major power generation client in the UAE to procure a clean coal project Assessed project success leading to changes prebuild, confirmed aggregate risk profile and better infrastructure credit rating Structured program controls and performance metrics for leadership insight and decision making for a European project Delivered program and procurement management and assurance for a power program Provided rapid project intervention, detailed review and rectification options for a project with major delivery delays Supported development and execution of new ISO compliant asset management strategy for US$50b asset portfolio Solutions architect for enterprise asset management system in the US, saving US$20m in first year Developed digital platform to provide detailed asset intelligence from existing data, estimated saving 10% of the asset base over a five-year period Supported development of strategic investment framework: governance, program management, investment appraisal and integrated management systems Supported nuclear decommissioning plan including design, development and delivery of project planning and control software Led program design and assurance: organization structure, approach, procurement support and compliance monitoring 7 8

6 Capital and infrastructure: Infrastructure builds economies, communities and prosperity. EY is committed to supporting the P&U industry in building a better working world. Safia Limousin EY Global P&U Capital and Infrastructure Leader Paris, France safia.limousin@fr.ey.com David F Bailey Charlotte, North Carolina david.bailey@ey.com Piotr Piela Warsaw, Poland piotr.piela@pl.ey.com Simon Benjamin Melbourne, Australia simon.benjamin@au.ey.com Chris Matthews London, UK cmatthews1@uk.ey.com Gavin Rennie Doha, Qatar gavin.rennie@qa.ey.com Igor Sadimenko Brisbane, Australia igor.sadimenko@au.ey.com Chris Lewis London, UK clewis2@uk.ey.com Brunhilde Barnard Johannesburg, South Africa brunhilde.barnard@za.ey.com Tim Calver London, UK tcalver@uk.ey.com The global EY network has over 4,000 power and utilities professionals across 180 countries. We mobilize our teams fast, allocating them to projects in the right place, at the right time, without delay. 9 For more information on how we can help you, talk to your regular EY contact or get in touch with one of our capital and infrastructure contacts. A new energy world requires a new approach to major energy infrastructure programs. EY uses the power of information, insight and innovation to overcome existing and emerging challenges around securing financing for these projects, assisting in ontime and on-budget delivery and help managing assets to provide returns on investment. EY global teams draw upon deep sector experience and industryleading methodologies to support you throughout the asset life cycle and help your project succeed. 10

7 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Global Power & Utilities Sector In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY s Global Power & Utilities Sector brings together a worldwide team of professionals to help you succeed a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively EYGM Limited. All Rights Reserved. EYG No Gbl GA 0000_7515 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com