Construction Ahead: How Our Construction Industry is Fueled by the Energy Environment

by Spilman Thomas & Battle, PLLC
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In 2007, Global Business Network (“GBN”) released the report, “Energy Strategy for the Road Ahead.”
 
The goal of the report was to “understand the factors that are likely to influence the U.S. energy environment in the future, and create strategies for its management.” The forward-looking report focused on what the U.S. would look like in 2020 based on changes to the energy environment, recognizing that “energy-related risks and opportunities will have profound impacts on U.S. business and society during the next decade and a half.”
 
This look into the future focused on all U.S. industries – including construction. In fact, one company highlighted in the report was California Portland Cement:
 
“Recognizing the value of a corporate-wide energy strategy could provide for the business, [CPC] empowered the company to move forward in instituting a comprehensive energy management system that encompasses all operations. ‘We did this by deliberately making energy management part of our core business, by creating a corporate function for energy, and by viewing energy as a profit center for our business,’ explain[ed] CEO Jim Repman.’”
 
A review of the article raises several important questions for those in the construction industry. First, how has the energy sector already affected the construction industry? Second, what effects are imminent? More importantly, why should those in the construction industry care?
 
The fact is that several looming energy sector changes will affect the construction industry in the U.S. Three such changes are in technological advancements, public policy, and legislation.
 
 Technological Advancements
 
Over the next decade, energy sector technological advancements will have a significant effect on various aspects of future construction projects, including (a) construction costs, (b) design and engineering of new construction projects, and (c) construction delivery methods. These advancements include the following:
 
(1)  Alternative fuel sources – These include solar, wind, geothermal, hydroelectric, tides.
(2)  Gas-to-Liquids (“GTL”) - GTL is a rapidly emerging technology that converts natural gas to liquid hydrocarbons reducing the cost of construction, which had been affected negatively by high and fluctuating crude oil prices.
(3)  Net Zero Energy Installations (“NZEI”) - NZEI’s are (military) installations that produce as much energy as they use in a year.
 
             Construction Costs
 
Lower-cost alternative fuel sources, such as natural gas, have already affected construction costs.  Manufacturing of construction-related products using alternative fuel sources can reduce production, and therefore product, costs.  Further, transportation of materials to construction sites is reduced where vehicles powered by natural gas or by hybrid fuel and electric power are used.  At the same time, costs for complex engineering and design associated with large, complex construction projects, such as infrastructure projects and power generation facilities, may increase, leading to contracts directed at capping costs with guaranteed maximum prices or staging work in such a way that costs are spread more evenly over the life of the project.
 
            Design and Engineering of New Construction Projects
 
Predictably, these changes in the energy sector very likely will affect the types of projects on which construction and design firms bid, and may require a substantial shift in existing construction and design firms’ business models to capture larger shares of future construction work. Construction and design firms uniquely situated for taking on these new challenges, or savvy enough to form joint ventures or subcontracting agreements with complimentary firms, are the firms that will survive in this new environment.
 
For example, large GTL projects may involve conceptual engineering, front-end engineering design (“FEED”) or engineering procurement construction (“EPC”) services. While the GTL technology is not new, having been used in Germany during WWII, the GTL “process is broadly entering the rest of the world.” Take a look at this article in Forbes. U.S.-based companies are involved in these types of projects in the States and abroad, where GTL projects are being planned and constructed. The largest GTL plant in the world, where 52,000 people worked, is Pearl GTL in Qatar. Construction of Pearl GTL involved a Development and Production Sharing Agreement with Government of the State Qatar, funded by Shell, and constructed by a joint venture between JGC Corporation, a Tokyo, Japan-based engineering contractor, and KBR, Inc., a Houston, Texas-based engineering, construction, and private military contracting company.
 
            Construction Delivery Methods
 
Energy industry changes have affected construction delivery methods. For example, FEED engineering is performed after a conceptual design or feasibility study is complete. FEED focuses on the technical requirements and estimated investment costs for the project. These contracts are more common for larger-sized projects that take about a year to complete. The goal of this type of contract is to avoid significant changes during contract execution.
 
Public Policy
 
Public policy has, and will continue to have, a major impact on the industry.   For example, the current administration’s focus on global warming is one departure from that of prior administrations. According to Morning Consult Energy, “The Obama administration’s upcoming greenhouse gas rules are gaining unlikely acceptance from power companies, splitting the energy sector's normally unified opposition to new caps, Bloomberg's Mark Drajem and Mark Chediak report. Energy Secretary Ernest Moniz said yesterday that states are pressing for the EPA regulations to credit for efficiency programs, according to E&E's Hannah Northey.”   Incentives to develop and grown alternative energy production, according to a report by the U.S. Department of Energy, has in turn led directly to “tremendous growth in the overall U.S. wind industry [and] more American jobs throughout a number of sectors and at factories and power plants across the country. According to industry estimates, the wind sector employs over 80,000 American workers, including… engineers and construction workers who build wind installations.” 
 
Increased demands by the government, military, and private sector for use of recycled and reclaimed materials in construction also impacts subcontractors and suppliers. Representatives from the NC Military Business Center recently confirmed that the Department of Defense (“DOD”) remains committed to “Net Zero”—which includes net zero energy, water and waste. These government goals and mandates impact and influence the private sector. For example, as demands for repurposed and recycled materials increase, suppliers for those materials will be more in demand. Similarly, more energy recovery facilities will be needed, and recycling contractors will be thriving. Subcontractors and suppliers who focus on, and advertise, how they can help the government and other owners achieve Net Zero, will be the ones with increasing work and growth opportunities.
 
Legislation
 
In North Carolina, recently passed legislation allows for design build (“DB”) and design bid bridging (“DBB”). DB has been a common construction delivery method on federal projects such as military bases. The statute, NCGS 143-64.31, requires an explanation of why the DB method was used instead of one of other delivery methods, including a list of anticipated benefits to the public owner. Many in the construction industry think this cost-benefit analysis under the new law will be impacted by energy use and consumption on these large governmental projects. Everyone involved on the contracting side will need to be able to monetize the energy-saving benefits they bring to the table. Subcontractors and suppliers may have to re-think their own energy consumption and become even more efficient in the entire upstream. Everything from the types of service vehicles used, energy use at the “home base”, types of supplies and materials used on the project, and project document storage and delivery can impact the overall energy impact of that piece of the construction project, and thus whether that contractor is ultimately successful in landing that project.
 
South Carolina recently took what is considered a historic step by approving a solar energy bill. "The state House of Representatives voted 105-0 for a solar energy bill that is forecast to make sun-generated electricity more abundant in the Palmetto State. The bipartisan bill has support from South Carolina's influential utilities and conservation groups, and a similar version of the measure has passed the Senate," reports the Columbia State (SC), May 21.
 
 WHY THESE CHANGES MATTER
 
In a nutshell, changes in the energy environment will affect the entire construction industry.  Energy-driven technological advances, public policy and legislation affect who will have a job within the construction industry, what type of jobs will be available, where the project sites will be located, what methods of construction delivery will be selected by owners, and how much profit one can make in the construction industry.  Thus, whether you are a subcontractor, designer, construction product manufacturer, supplier, engineer, construction manager, owner, architect, or advocate for someone within the construction industry, it will be important to understand the impact the energy sector has and will have on your business.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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