Commercial approach
Lump sum turn-key contract
Hybrid contract – bespoke based on client and project needs
Cost – reimbursable
Contract features both cost-re and LSTK characterisics for various sub scopes
EPC contractor is provided a xed price to perform work
EPC contractor is reimbursed based on actual incurred costs
Risk transfer to contractor
Least
Greatest
Owner involvement, in uence & exibility
Greatest
Least
Figure 2 The spectrum of EPC contracting strategies for large-scale projects
these two traditional contracting frameworks, which incentivises both investors/lenders and EPC contractors, while identifying and distributing the risks appropriately. EPC contractors are well-positioned to take some risks. However, new technologies make the commissioning schedule and performance significantly less certain. Sponsors can mitigate these risks through early engagement with EPC companies like Bechtel in the pre-FEED (front- end engineering and design) or FEED phases. This early engagement of engineering and delivery expertise can have a powerful impact on a project’s likelihood of success. While performing a FEED before final investment adds development costs, this exercise gives sponsors a far better understanding of costs, reduces process integration risk, optimises design, and ensures technical feasibility where it may have otherwise been in question due to the emerging nature of energy transition technologies. This additional development work helps define risks appropriately to enable efficient allocation among all involved parties. Partnering with a reputable EPC firm with a track record of delivering large-scale projects goes a long way to providing comfort to lenders and investors. In addition to adopting an optimal contracting approach, other strategies can help mitigate risks in energy transition projects. While still in the early stages of development, insurance can take on some of the completion and performance risks associated with a FOAK energy transition project. Furthermore, the sponsors, especially companies with credit- worthy balance sheets, can provide contingent
equity or balance-sheet financing to cover project risks and performance shortfalls to unlock lender financing. Lastly, many governments, infrastructure banks, and export credit agencies (ECAs), such as the US DOE, UK Infrastructure Bank, and Export Import Bank of Korea, have developed guarantees to support FOAK facilities. These guarantees lower the cost of capital and reduce risk for private lenders, thus attracting private investment and making a project more bankable ( US DOE, 2024) . Market risk Market risk is a key hurdle for energy transition projects. On a good day, energy markets are volatile, impacted by everything from geopolitics to weather. Throwing energy transition projects’ products into the fray adds yet another layer of complexity. Commodities such as hydrogen, ammonia, and methanol are currently produced using carbon-intensive methods and have established markets. Producing the same commodities using low- carbon pathways, however, significantly pushes up their cost of production. Currently, there is uncertainty as to whether the market will pay the difference in prices between low-carbon and carbon-intensive commodities, which is referred to as the ’Green Premium’. Even if there are purchasers willing to pay the Green Premium now, it is relatively hard to generate accurate long- term market forecasts or find purchasers who will commit to long-term offtakes. This creates a challenge for energy transition project sponsors. Here is where the government plays a beneficial role. With the urgent need for energy
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