Who is an EPC and why does it matter?
EPC, which stands for Engineering, Procurement, Construction, refers to the company that does turnkey work for a solar power plant implementation – from design, to procurement of components to power plant construction. Some EPCs also take up maintenance work during the duration of the solar power plant.
It is said that the choice of an EPC is a critical factor to the success of a solar power plant, especially MW scale solar power plants. Why is this so?
Why is selection of EPCs a critical activity for the success of solar power plants?
EPCs are the most critical component in the implementation of a solar PV power plant, as they are the glue that put together the design, procurement and the complete construction. For an industry in its initial stages, selecting the right company for turnkey implementation is not surprisingly one of the most critical activities for a developer.
While the difference between a good and very good (or great) EPC might not sound like a lot on paper, remember this: Even a 2% increase in output as a result of your choosing a very good EPC (instead of a good enough EPC) increases your output per MW by about 30000 units a year, or close to one million units over a 25 year lifetime. That would be about 60-70 lacs additional money for you for the project lifetime, and this is just for 1 MW. Just imagine the additional profits for a 10 or 25 MW plant you are putting up!
In addition, a very good EPC might even be able to assist you in getting a loan at a slightly cheaper interest rate (or your going with a very good EPC might make the bank perceive the project as lower risk and reduce the interest rate a wee bit). Even a fractionally lower interest rate could significantly increase your RoI.
And there could be more. A very good EPC, because of meticulous planning, could even complete the solar power plant a month before a good-enough-EPC. Now that would be project cash flowing a month earlier. As an investor or a business promoter, you know how important getting that cash a month earlier could be!
EPC Selection is not Just Another Decision for A Solar Power Plant Developer
As India accelerates forward on installing 100s of MW of solar power plants, and with hundreds of new corporates keen on entering the solar power sector to put up power plants, one important entity that should be carefully considered is the EPC.
While it might appear to some that the EPC is nothing more than a glorified combination of a construction electrical company, in the context of solar, EPCs are much more than that. Given that solar is a renewable resource with a good amount of infirmness built into it, and also given the fact that the plant has to operate well for 25 years, and finally given that solar power plants are still quite new to India, selecting the right EPC might make all the difference between an exceptional power source and a failed investment.
Even though the solar power story in India is barely 5 years old (as of Dec 2015), there have already been cases of poor power plant construction. There have been cases chronicled in Gujarat and Rajasthan where solar power plants, hardly a year old, needed to be rebuilt! The moral of the above stories? Don’t go for an EPC just because he quotes a low price, first evaluate the EPC on critical performance parameters and only after he had scored well on each of the parameters, consider the cost/price
Choosing an EPC is perhaps one of the most important acts you do as a solar power plant developer. Whatever other parameters you use while choosing your EPC, dont forget to follow these three rules:
- Do not go for lowest cost EPC. There is a very likelihood you will end up with the lowest quality solar power plant
- Do not go for EPCs who are unwilling to discuss quality aspects of the components and solutions threadbare. An EPC who does not sit with you and discuss each and every quality parameter of every component possibly does not know much about them himself!
- Do not go for EPCs who start their marketing pitch with their price. An EPC for whom price is the starting point also is an EPC for whom price will be the ending point – he quite likely has no other selling points!
What are the key parameters that should be used to select EPCs or do due diligence on them?
The EPC contractor essentially guarantees completion of the plant on time and cost, and also plant performance, thus enabling the project developer to avail finance from their banking partners. Thus a thorough evaluation of the EPC is required before a choice is made.
Top 5 Criteria for EPC Selection
- Their corporate background and earlier work background; number of years they have been in this field
- Case studies of the projects they have implemented
- Team composition, and technical/engineering skills of the key professionals in their team and strategic partnerships for technology
- Their technology/module/inverter supply partners
- Financial strength of the EPC or the parent company to which the EPC belongs
Other Criteria for EPC Selection
- Tie-ups with financial institutions
- Sub contractors they work with
- Project management and O&M skills – an EPC with good O&M skills can also then continue to maintain and operate the plant for you
- Flexibility; also, experience of working under different conditions – geographies, terrains, timeframes… Other Value-adds
Any EPC you should choose should have high level of expertise in the following Engineering
- Design for PV Panels
- Inverter Selection
- Electrical Design
- Civil & Structure Design
- Design for Power Evacuation
- Other BoS – AC & DC Side Electricals, Cables, Monitoring Systems
- Project Management
- Government Liasioning
Are there different types of solar EPCs? What are the differences?
As you will expect, EPCs come in difference colors and shades. Dedicated to Solar or Otherwise – Firstly, there are EPCs who are pureplay solar EPCs, while on the other hand some others who are not dedicated to the solar power sector but undertake EPC projects for other sectors as well – real estate, infrastructure etc. Backgrounds – Secondly, the past backgrounds of many EPCs could be quite different from one another as well. Some of the common EPC backgrounds are:
- Independent integrators/consultants
- New, young startups with some knowledge of construction and/or electricals
- Experienced Indian EPCs (with experience in non solar) with international technical and design tie-ups
- Experienced Indian EPCs (with experience in non solar) with no significant tie-ups
- Experienced Indian solar EPCs
- Experiences International solar EPCs
- Panel manufacturers
- Small and Large – Thirdly, there are solar EPCs – who do small scale, usually rooftop solar systems and others who undertake large-scale, MW scale power plants. The small scale EPCs sometimes also undertake contract EPC (usually the construction part) work for the larger EPCs.
How important is the cost/price for an EPC while choosing a solar EPC?
While cost or price is never unimportant, it should not be the most important reason you choose an EPC. Please consider the list provided earlier for the Key EPC Parameters to Look for. These should be higher in your priority than the price the EPC charges. As you are building a power plant that has to last 25 years, it is better to bet on high quality than on low price.
What is the right price for a solar power plant – in Rs crore per MW?
As explained in the answer for the previous question, price is only one of the key variables. However, it is a critical one.
A solar EPC quotes a turnkey price to instal a solar PV power plant. With different EPCs quoting different prices, how do you what is the right price?
As of Dec 2015, a 1 MW solar power plant in India can be commissioned at a cost of about Rs 6 crore/MW, all inclusive. Given this, how do you evaluate an EPC based on the price he quotes?
Is the company quoting Rs 7 crores earning abnormal profits? Or is the company quoting Rs 5 crores compromising on quality?
While generalizations are difficult to make, the following can be said with certainty. If the high quality module prices are ruling at about 50 cents per W (approx Rs 33/W or Rs 3.3 crores/MW), it is well nigh impossible for EPCs to put together a solar power plant with these high quality modules and the balance of systems at less than Rs 5.5 crores per MW (even if land cost is not taken into consideration). It might just be possible that owing to special relationships some of the top EPCs have with both module suppliers and balance of system makers, and by squeezing in some project management efficiencies, EPCs could be able to offer up to about Rs 5.5 crores.
But as of Dec 2015, with the current prices of the various components (and with module prices firming up even further with Eu setting floor on Chinese modules and with the Japanese market hotting up), EPCs who are offering at less than Rs 5.25 crores or whereabouts are either compromising on quality or are willing to take up a loss to build market share (more likely the former).
As a developer, you should first ensure you select the EPC with the right credentials and then bargain tough with them. It is likely that their lowest offer will be at least 5% higher than the lowest offer from upstarts and companies not fully credentialized, some times higher by 10% even. The 5-10% increase is something you should worry about – in fact, you should realise that this is the right price, the “artifical” low price is the wrong price.
Are there international norms for selecting EPCs for solar power plants?
There are few, if any, international norms for solar EPC selection as this is a fairly new industry.