Let Experts Stick To What They Do Best
Guest blog by Henrik Stamer, managing director at K2 Management
Imagine you are planning a house extension. Would you hire a carpenter to do all the electrics and plumbing too? It might be cheaper than using qualified experts, but would you trust the carpenter to deliver the same standard of work as specialist tradesmen?
Now look at offshore wind and ask the same questions. If the sector is going to reduce its cost of energy significantly, it has to stop forcing suppliers to expand their scope of work beyond their core competencies. It is easy to see why this trend has developed. Banks often prefer one contractor for an offshore project, usually under an EPC (Engineering Procurement Construction) contract, because they consider that this reduces their risks.
And the same is true for other types of investors. Cash-strapped utilities that used to finance offshore projects from their own balance sheets are now seeking co-investors. However, these co-investors —equity funds and other financiers— are like banks: they too want to reduce risk, so they often ask suppliers to expand the scope of their work.
In certain cases, EPC arrangements may be the best solution for a developer because, if no single organisation controls all aspects of a multi-contract project, problems sometimes go undetected. Therefore, we increasingly see turbine manufacturers mobilising their organisation and subcontractors to deliver turnkey wind projects.
At the other end of the value chain, installation vessel providers are starting to offer full balance-of-plant solutions under engineering, procurement, construction and installation contracts.
However, this perception that engaging one big company automatically reduces risk is misplaced. The financial crisis taught us that companies —in that case banks and other financial institutions —are best when they focus on their core business, making it more efficient, lean and competitive. These organisations got into trouble after overreaching themselves and trying to expand into areas beyond their traditional businesses.
By forcing different suppliers into what are, for them, unknown areas, we believe that we will see more mistakes happening. This will increase project costs. And bear in mind that lost power generation due to delays is rarely covered in these contracts.
We should not be forcing suppliers to widen their scope of products and services. We ought to be challenging and enabling them to do what they are best at, their core business, and letting them handle their own risks within that sphere.
This is an edited and abridged version of this article on the K2 Management website