In contrast to other windfarm owners and developers that have established supply chains that achieve economies of scale through standardization, and replication of proven, reliable, and cost-efficient technologies and processes, Mainstream Renewable Power (MRP) has locked in a high-cost supply chain for its Neart Na Gaoithe windfarm. This could explain why the Department of Energy and Climate Change’s Final Investment Decision Enabling for Renewables (FIDeR) regime classified the windfarm as “unaffordable.”
In what way is the supply chain configuration expensive?
- The group appointed an exclusive preferred supplier (Siemens), apparently before deciding on the technology platform or negotiating price or terms. Although this is done sometimes in the oil and gas business, this approach should be reserved for risky and/or remote projects where a single source is the only or clearly the best option. It is not a “best practice.” My book “Optimal Supply Chain Management in Oil, Gas and Power Generation” has a flowchart that shows when to single source, and the chart shows that there are relatively few circumstance in which you want to specify the source before choosing the model or negotiating a price. MRP just wrote Siemens a blank check. There is no doubt that Siemens is a great supplier; it’s just that this approach is not the most cost-efficient way to manage a project that is struggling for financial viability.
- MRP has decided to outsource project management from soup to nuts. It will outsource Engineering, Procurement, Construction and Installation, rather than just E or EP or EPC. For sure, EPCI firms get the job done, but they charge a premium for it and usually have an incentive to increase the cost of the project rather than reduce the cost (since they frequently get reimbursed as a percent of the cost). If you have the capabilities in-house (and perhaps MRP does not), you can reduce the cost of the project by managing it yourself, as other major windfarm owners/operators have done.
- It enlisted two EPCI partners rather than one, which is bound to be even more costly than having one EPCI partner, as each one will need to be compensated. As a 25% shareholder in MRP, the choice of Marubeni is obvious, but the rationale for tacking Technip on too is less obvious.
There may be reasoning behind these agreements that makes them cost-efficient supply chain maneuvers, which MRP is keeping close to the vest. Let’s hope that there is some hidden supply chain wisdom in play.