Welcome to E3's first episode of The Top 3 by E3! In this episode hosted by Ginger Elbaum, E3's Managing Director, Paul Plath, takes listeners inside the world of Independent Engineering. Paul is E3's President and one of the original founders of E3 Consulting over 22 years ago.
With more than 30 years of experience and hundreds of project-financed projects under his belt, Paul has seen a lot. He discusses the myriad reasons that lenders, sponsors, and other stakeholders hire Independent Engineers (IE) and the ways that IEs are able to benefit a project. As part of the "Top Three" series, Paul provides his top three takeaways on the profession, including:
For additional information about E3 Consulting, or the subject of Independent Engineering, reach out to Paul Plath at paul.plath@e3co.com or to Ginger Elbaum at ginger.elbaum@e3co.com.
Welcome to E3's first episode of The Top 3 by E3! In this episode hosted by Ginger Elbaum, E3's Managing Director, Paul Plath, takes listeners inside the world of Independent Engineering. Paul is E3's President and one of the original founders of E3 Consulting over 22 years ago.
With more than 30 years of experience and hundreds of project-financed projects under his belt, Paul has seen a lot. He discusses the myriad reasons that lenders, sponsors, and other stakeholders hire Independent Engineers (IE) and the ways that IEs are able to benefit a project. As part of the "Top Three" series, Paul provides his top three takeaways on the profession, including:
For additional information about E3 Consulting, or the subject of Independent Engineering, reach out to Paul Plath at paul.plath@e3co.com or to Ginger Elbaum at ginger.elbaum@e3co.com.
Ginger Elbaum (10s):
Welcome to the Top 3 by E3 Consulting, a monthly podcast about the intersection between engineering energy and project finance ether is a firm of technical advisors who provide independent and owner's engineering services to capital providers, project developers, and other stakeholders. One of our goals is to ensure that projects are bankable, meaning that they are both technologically and commercially feasible projects, allowing them to obtain funding for development. This gives us a front row seat to the so-called brave new energy world. In addition, we've chosen a field that allows us to be lifelong learners, and we enjoy sharing what we have learned in educating our clients. In each episode, we'll explore the top three takeaways about a particular topic, examples being hydrogen, wind, power, energy storage, or simply market trends.
Ginger Elbaum (52s):
We hope you can join us. And we would love to hear your questions and suggestions for upcoming episodes. Write to us at e3@e3co.com.
Paul Plath (1m 0s):
Today. We're talking with Paul Plath, president of E3, and one of <inaudible> co-founders and Paul and I are going to address some frequently asked questions about the independent engineering or IP space. For example, what is an IE when should you engage in IE how does an IE add value? So let's get started. Welcome, Paul. Hey, thanks, Ginger. It's great to be here today.
Ginger Elbaum (1m 19s):
Why don't I kick us off with an easy one? I know E3 just celebrated its 22nd anniversary on March 1st, but how long have you been an IEE business?
Paul Plath (1m 27s):
You know, I've been doing this sort of thing for about 35 years now. I, I started out almost 40 years ago in the utility business working for a large investor owned utility, but after a couple of years, got my first job in the consulting business doing independent engineering work. So yeah, we're going on close to 35, 36 years now doing this sort of thing.
Ginger Elbaum (1m 52s):
Wow. That is certainly highly experienced. Paul
Paul Plath (1m 58s):
That's my gray hair. We'll test it. Right, right. So what exactly is an IE and what does one do? As the name implies, an independent engineer is an independent technical consultant that is usually hired by a financial party that's participating in some sort of an energy project, whether it's a power plant or a pipeline or other related infrastructure. The reason that someone might hire an independent engineer is to really assist with the due diligence process that you would go through and in any major investment in a capital project and due diligence means basically checking the facts.
Paul Plath (2m 41s):
And our role in, in that process is to look at the technology. That's involved, understand how the project has been put together to make sure all the pieces are there and everything fits together, whether it's on technology permitting, how it's physically going to be built the contract surrounding the construction of the facility, as well as the supply of fuels or off-take. So the products and, and the other commercial arrangements that are necessary to build and operate any sort of a complex energy or industrial facility. So that's, that's basically it, we're there to assist someone with sort of a normal due diligence process on a, a large energy project.
Ginger Elbaum (3m 25s):
Right. So, you know, so you mentioned, you know, providing an independent perspective, which is really important for these capital intensive projects, but you know, what else? How do you believe that an IE really provides value to a project?
Paul Plath (3m 39s):
One of the key features there is the, is the word independent. We're not a, we don't have a stake in the project itself. So we are free, free to criticize where we think it's necessary. If we find that there are gaps in the project that are potentially risky or could, could cost a, one of the participants, a lot of money or time, we don't have relationships with the contractors or the equipment suppliers. So we can be completely open and objective about our opinions. I mean, that's really the key there is that we are a third party we're coming in from the outside and the ideas that we can be completely objective in our opinions and also apply our experience in having been through really hundreds of, of different projects.
Paul Plath (4m 28s):
We kind of understand where mistakes tend to get made in the, in the business. And we look for those mistakes and try to guide the parties through areas that are typically risky or where mistakes have been made in the past.
Ginger Elbaum (4m 42s):
Yeah. And I think one other thing I would add is that, you know, along the lines of risk is, you know, we can, you know, using our experience, identify, you know, how risky is this really? Like, how often do we really see an impact from some of these risk areas? And then we can also offer some risk mitigation. I, you know, ideas as well, if, you know, if that's beneficial to the client based on the project.
Paul Plath (5m 8s):
Exactly. So part of what we do is every project will have risks. There's, there's no way that you can mitigate everything, at least not economically, but part of our job is to sort through those risks and separate the mountains from the mole Hills and try to put some brackets around it. Is it really a risk that is likely to happen? And if so, is it likely to be costly in terms of either money or schedule or our performance impact? So yeah, everything, every project has risks, but we're really most interested in the ones that could potentially have a significant impact and are, have a likelihood of occurrence.
Ginger Elbaum (5m 49s):
You know, one other thing Paul, that I would add as well is, you know, you know, E3 does development support too. And so, you know, kind of back to your, on, you know, utilizing our experience, you know, we see so many of these projects, whereas a developer will see one or two, right? So we can use that experience to help, you know, clients put together, right. You know, what's financial, what's, you know, acceptable in the market right now. What are typical market terms and kind of help developers in that way as well. I mean, that's a little bit different from, you know, a little bit of a departure from the typical IE services, but, you know, development support is also something that I think sees a lot of benefit from our experience.
Paul Plath (6m 30s):
Exactly. And, and we, we do quite a few of those assignments where we're getting hired by a developer or a sponsor to the comment earlier than we normally would as an IE and just help them look for things that, that maybe are potentially risky, that they should spend some time, you know, tightening up terms of agreements. But as also, as you mentioned, just giving you the information that would allow them to proceed with commercial negotiations, understanding better what the typical terms and conditions are, what, what things they can ask for, what things are likely to get pushed back on, you know, from vendors and contractors,
Ginger Elbaum (7m 9s):
You know, Paul. So to, to something you just said, what is the kind of the best time to get an I E involved in a project? I mean, what's that best timing do you think? Yes,
Paul Plath (7m 21s):
Certainly there is too late and there was too early. Ideally, you know, I'll start with the too late. That's when you know, really the project is, is fully baked and ready for construction, because if all the, all the contracts have been signed, everything is ready to go. Then if we do find issues or if a lender or equity participant has issues with the, with the contracts as they've been signed, then it can be a costly and time-consuming to unwind some of those things and to make changes at the last minute, or if something is just simply been missed and you have to go back and negotiate changes to the contracts sort of at, at the last minute, then that is obviously a time-consuming and costly of event.
Paul Plath (8m 14s):
So, you know, generally we like to get involved just as, you know, the primary contracts are in final stage, you know, almost ready to sign that sort of thing just before you'd have the final legal sign-offs in the sign-offs from the lenders. And of course the IE on the flip side too early is before you've made the key decisions about who your vendors are going to be, who the contractors are going to be, who your O&M providers are going to be when all the documents are essentially in their initial form. Because at that point, we really just don't have enough information to provide, you know, useful opinions. And if we're going to be looking at reviewing multiple, multiple crafts of agreements or permits are finalized, whatever the case may be, then, then our services really aren't as valuable at that time.
Paul Plath (9m 5s):
And we'll be spending a lot of extra time and money that would be better spent later on in the project.
Ginger Elbaum (9m 12s):
Yeah, sure. Okay. What industries typically need an IE?
Paul Plath (9m 19s):
Any project that is going to require external funding, either through finding outside equity sources or outside lending sources, it's probably easier to answer which industries do not. I mean, typically industries like oil and gas exploration, refining those, those kinds of areas. Those are generally all large capital projects are generally funded in house through corporate funding. They don't usually go out to the project finance markets or see a third party equity participation. So generally they're making all their own decisions and doing all their own internal due diligence for those kinds of projects where IES are needed, or are those cases where you are going to the project finance markets or equity, you know, third-party equity tax equity, venture capital markets, where generally those investors are going to require some sort of rather formal due diligence process.
Paul Plath (10m 25s):
And that covers, you know, that's not just in the energy industry, it's infrastructure, water pipelines, waste treatment, large industrial projects, ports, roads, dams, bridges, all that sort of thing, where, where there might be project finance used, or third party equity.
Ginger Elbaum (10m 45s):
Okay. Okay. What are the key risks that an IE usually focuses on?
Paul Plath (10m 51s):
Well, generally they fall into three or four categories. One is technology and technology is not always a large issue, but certainly is something that everybody is, is normally concerned about. At least initially, you know, will the, the primary concern is, is the technology commercially proven? Do the vendors have good experience with the particular technology for the application? You know, we've seen this particularly in the rapidly developing parts of the electric energy sectors, such as renewables wind turbine technology is, is for example, has advanced very rapidly over the past decade.
Paul Plath (11m 32s):
There are new models coming out every year from the major vendors with, with upgrades and changes and modifications. Similarly on the solar side and now with, with battery energy storage technology. So there are concerns about whether the technologies that are being utilize for a particular project are really proven and do is a really good understanding of what the potential issues may be or downsides with, with a particular technology. Now, that's less an issue with the more established thermal technologies that have been out there for, for decades like gas turbines, but, but even then, you know, those technologies are continuing to advance and, and we have to keep up with those changes and, and why those changes are being made, you know, beyond technology we'll look at all the other sort of key project development issues, primarily permitting interconnections, whether it's interconnecting to the electrical grid or to a pipeline system or to transportation systems, we'll be looking at capital costs, not verifying the capital cost estimates are based on reasonable assumptions and, and, and a good bid data from vendors and contractors, the construction schedule, again, to verify it's reasonable and the durations make sense.
Paul Plath (12m 51s):
And that'll allow for, you know, the usual delay issues that will occur during the construction of a project, the commercial arrangements for structuring contracts, operating contracts, maintenance agreements with vendors, that sort of thing. And then, and then finally it all boils down to the financial projections. And really the IE business comes down to being able to verify what's in the financial models, from the perspective of CapEx and OPEX costs, as well as performance projections, reliability, long-term maintenance costs and the useful life of a facility.
Paul Plath (13m 31s):
Yeah. And something else, you know, kind of along the lines of risk mitigation and the financial model, looking at when we look at technologies that maybe are newer, you know, that's a place in the model where you might consider risk mitigation, right? So you might include some additional operating costs and thinking about construction, you know, look at schedule and time. And, you know, maybe it'll take a little bit longer to commission these units or, you know, with some learning curve. So I think those are also places where we think about risk mitigation, but you know, all of it boiling down to the financial model and how all the parts kind of play into that model.
Paul Plath (14m 12s):
And are there opportunities to mitigate risks there as well? Yeah, that's right. Whether the risk mitigation is through additional contingency funds for construction or operations, whether it's through some contingency in the schedule, you know, allowing yourself time to be late, if necessary, or to delay the construction of a project, if for some reason that that makes sense, you know, as well as just understanding the, the overall resilience of the project to changes in assumptions that that may occur along the way.
Ginger Elbaum (14m 44s):
Right. Right. Well, so Paul one project, I mean, you've, you've seen a few projects over your, you know, span as an IE here at when projects do get into trouble. What are some of the most common reasons? Is there a trend?
Paul Plath (15m 1s):
You know, it's, it's usually something unexpected or a change in sort of a larger macro market situation that, that wasn't expected. You know, honestly, in the probably 300 projects I've looked at technology has only been a cause of project failure in a few instances where the thing just didn't work and couldn't be fixed. Generally technology issues can be overcome. It may take some time and money, but generally they can be overcome. Eventually the things that are more difficult to overcome are fundamental shifts in the market that were unanticipated examples of that are, are sort of, you know, deal changers that we've seen in the, in the US market, like the development of fracking and horizontal directional drilling that suddenly made natural gas, very plannable and cheap.
Paul Plath (15m 56s):
And that was something that nobody really saw coming until it happened. And, and so that was a fundamental change in the market that suddenly made, you know, existing coal fire power plants, uneconomic in most parts of the country. So a basic fundamental change like that, or, you know, the rapid decline in the price of solar and wind capacity, which again had never really happened before in the power and energy markets where a technology came in that got year after year cheaper and cheaper and cheaper to build. So that had a significant impact. You look at restructuring of markets in certain areas like in ERCOT, where the decision was made to deregulate and go to a fully retail market.
Paul Plath (16m 43s):
Well, that changed underlying economics of particularly existing power and energy facilities and those kinds of markets. And so it's generally those large macro impacts that are, are, are really unforeseeable that cause issues. And certainly this year was no exception with COVID. Nobody saw that coming and that had significant impacts in some cases on, on both projects, under construction and on the market overall, or we saw, you know, large decline and demand for electricity and natural gas and liquid fuels and resulting declines in prices, which obviously it was not something that more than a year of go, anybody saw coming.
Paul Plath (17m 25s):
So those are usually the issues that end up causing the most distress to projects.
Ginger Elbaum (17m 31s):
These are really good points, Paul. And so, you know, how can I help to turn around a distressed project? Is there, is there a part to play for them?
Paul Plath (17m 42s):
The key thing with looking at any facility is its future adaptability, because the only thing we really know for is that things will change. And so with any large capital project, you want to make sure that even though you, you think you understand the business case very well today, Oh, we do know that at some point that's going to change. And so will the project, will that physical facility be able to adapt at some time in the future? Can you modify that technology? Can you modify the operations of the facility to make it work better under a changed operating regime or change market regime and the future, you know, that's obsolescence is, is a big issue with technology evolving so quickly that you want to make sure that your projects are able to either incorporate or adapt in the future.
Paul Plath (18m 38s):
You know, good examples are large gas fire plants that were built 20 years ago of fully expecting to be base loaded units for the rest of their lives. And now they're operating in as intermediate or even almost peaking capacity. So were they, were they able to adapt to that change? What needed to be done to make them adaptable to the change? You know, examples we're looking at today with, with newer technology, like battery energy storage systems. We know battery technology is advancing quickly. So can a project that you build today with today's technology, be adaptable or a C2 able to repower five or 10 years down the road with the latest battery technology that may have better performance characteristics than what you can buy today.
Paul Plath (19m 27s):
So that's really what we ask: Is the facility or the project flexible enough that it can likely adapt to changes in the market going forward versus being so dialed in to a specific use case or operating case that'll be obsolete if there's a significant change in the market?
Ginger Elbaum (19m 48s):
Yeah. I also think about, you know, combustion turbines that can also burn hydrogen, you know, up to a hundred percent hydrogen. I mean, we're starting to see that as a plan for the future as well. So I think that's all really interesting.
Paul Plath (20m 5s):
Yeah. Adaptability to alternative fuels in the future, you mentioned hydrogen, you know, renewable, natural gas, renewable diesel, all these, all these different and greener fuels that are coming up. Part of that is part of what we looked at is, is can the technology that they're using those kinds of fuels today, be able to adapt to future, you know, greener synthetic fuels in the, in the future.
Ginger Elbaum (20m 30s):
Yeah. Paul, last question. So you've been doing this for a while, as we've maybe mentioned once or twice now. So, you know, how has the business evolved? I mean, I've, I've been here for 14 years at eighty-three and it's, you know, it's evolved in my, you know, short 14, but what have you seen?
Paul Plath (20m 51s):
Generally when I started in this business, particularly 30 years ago, most of our work was very technology focused. That was really the key issue that we were hired to look at, you know, 30 years ago, and up to 20 years ago, and even 15 years ago, most everything we got involved with power projects had had long-term power purchase agreements. So the, the revenue side of the projects was really much more certain and, and almost fixed and was not considered the risky part of the operation. Everybody was more focused on the efficacy of the technology, the construction costs operating costs, long-term useful life assumptions.
Paul Plath (21m 33s):
So we were really focused on just technology and construction and how well is the facility can operate. You know, since then, really the focus is really shifted more towards the market side. Being able to understand how the markets are evolving, how pricing may evolve in the future, how access to fuels or feedstocks may change as well as commercial terms for equipment and construction and operations. So our scope is, is really broadened beyond just looking at technology to, to really be able to help our clients assess how these projects fit into the markets both today and perhaps in the future, you know, 10, 15, 20 years in the future.
Paul Plath (22m 23s):
So it's, it's become a kind of a wider view of, of macro economics in the energy sector or the other industries that we're looking at.
Ginger Elbaum (22m 35s):
Yeah. That's interesting. So, you know, Paul, this is The Top Three by E3 podcast. So what three takeaways would you want our listeners to walk away with here today?
Paul Plath (22m 48s):
It kind of goes back to a couple of things we already hit on one is, is timing is important. As I said, with IE work, you can, we can be brought in too soon or too late. And time generally is money has the old saying goes, if we, if we come in too late and we find issues or are the lenders or investors that we're working for or find issues, then it it's very expensive at the last minute to be making changes. So bring us in early enough that changes can be made before. They're, they're really chiseled in granite and, and become very difficult to, to modify vice versa.
Paul Plath (23m 30s):
Or brought in too early. Then there's just too many open questions to be dealt with at that point. And our, our work becomes very efficient. So what we suggest is how do you find the right the right time is to talk to us, start talking to us early, and then we can help you assess when it would be the right time to really get started, you know, based upon where you are, where the sponsor developer is in the development process. And we can try to pick what would be the appropriate time to really get involved in a project. So that's the one point timing matters. IEs do cost money. I mean, we don't work for free, but generally I think we can demonstrate pretty well from our past history that ultimately we can help you save a lot of money in your project.
Paul Plath (24m 18s):
We can help you find risks and gaps in the project early on when it's still relatively easy to fix or cheap to fix those problems before they become really embedded in your project. And then, and then hard to change later on. And then also, I think kind of the third point is you should look at an IE is really one of your partners in a project we're there to help project developers and sponsors and our, our investor and lender clients to be successful too. That's what we want. We want to be associated with successful projects. And so we're trying to help you become successful by looking for issues and mitigating those issues upfront and, and helping you navigate through the sometimes very long and, and torturous process of getting projects, finance.
Paul Plath (25m 7s):
So you should be looking to us as a partner and, and, and trying to take advantage of our, you know, many years of experience at looking at hundreds of different projects to help avoid some of the pitfalls and problems that we've seen before. So we can, we think we can add significant value to a project overall if our clients, you know, choose to use our experience in that manner.
Ginger Elbaum (25m 31s):
Yeah. I think that is an excellent point, Paul, and thank you. I really enjoyed it. And thank you to our listeners for tuning in. We hope you enjoyed today's topic. And if you have any questions for Paul regarding IE services, or have any questions for our suggestions for future topics, please reach out to us at e3@e3co.com. And thanks for listening today.