Green operating models in engineering and construction

Sep 12, 2022

Anthony Caletka
Principal, Capital Projects & Infrastructure Energy Leader, PwC US
Michael Sobolewski
Partner, Trust Solutions, PwC US

The engineering and construction (E&C) industry is poised for an integral role in the nation’s push toward a net-zero future. Given a gathering societal momentum surrounding a growing demand for decarbonization and resiliency of assets, the E&C industry will likely build out greener operating models to capture new sources of revenue and profits, which we explore in our Next in engineering and construction report.

Most recently, The Inflation Reduction Act’s provisions supporting clean energy are expected to result in redoubled efforts for clean technology infrastructure on the heels of the 2021 Infrastructure Investment and Jobs Act (IIJA). The Department of Energy in July announced $2.6 billion in IIJA funding for two programs supporting carbon capture demonstration projects and the expansion of regional pipelines used to transport carbon dioxide for permanent geologic storage or for converting it to end products including construction materials.

With the built environment accounting for 37% of global CO2 emissions, E&C firms can position themselves to lower the emissions output of their projects in the following ways:

  • The E&C sector is poised to converge with the clean energy and clean technology sectors, and those firms acquiring the appropriate capabilities and making the right M&A realignments will likely be better positioned to succeed.

  • Successful E&C firms can straddle traditional business models and transform by developing new parallel business models that focus squarely on decarbonization of assets.

  • E&C firms should take the long view on what kind of company they aspire to be in 2030 by identifying which green energy and cleantech spaces they want to specialize in and build those capabilities now. 

  • Emerging tech/business models need agility and governance.

  • Additional sources of growth capital and tax efficiencies can be gained through vehicles such as special-purpose acquisition companies (SPACs).

How E&C firms can green up their business models

E&C as clean-energy entrants

Many E&C firms are pursuing differentiated, more competitive operating models designed to integrate new services and capabilities at lower costs and with faster R&D cycle times – specifically with product offerings related to environmental, social and governance (ESG) product offerings (e.g., renewables, nuclear, carbon reduction, net-zero-as-a-service) that have a global reach, and that can lure new investors, new alliances and delivery business partners. Reflective of their newcomer status, these offerings often are untethered to corporate overheads or risks tied to core governance or financial performance of the parent company.

Business combinations and collaborations vertically integrate green offerings

To expand decarbonization and resiliency capabilities – and enhance brand and top-line growth – E&C firms are taking different approaches. These include spinning off parts of the business, forging new alliances and business relationships, and acquiring clean energy and cleantech companies with needed capabilities and experience. Initiatives like these can unlock opportunities to future-proof projects, such as “greening up” a legacy asset like a gas-fired electricity plant or an aging steel mill (e.g., integrating renewable energy, nuclear blue/green hydrogen, biofuels and battery storage into buildings and facilities).

E&C companies are investing in ventures dedicated to meeting demand for innovative energy solutions. For example, Fluor Corporation in 2011 became a majority stakeholder in NuScale Power, a developer of a carbon-free small modular reactor technology, which went public in May 2022 following a merger with Spring Valley Acquisition Corporation, a SPAC. In a similar vein, Baker Hughes entered into a strategic partnership with – and invested in – NET Power, a company that converts natural and renewable gas into zero-emissions power. Other companies in the business partnership include McDermott International, 8 Rivers Capital, and Oxy Low Carbon Ventures. Such investments demonstrate a way for large incumbents to enter a market in a nimble, venture-capital approach while adding value and strengthening the brand of the parent company.

Consider the joint venture with McDermott International and Baker Hughes, a project architect and systems integrator, focused on carbon reduction and sustainability. The strategy involves collaboration between energy specialists at both companies to develop early conceptual design options and assist in the project selection in the early stages of project definition to yield more accurate project cost and schedule forecasts. While this early-stage offering (i.e., feasibility, concept select/definition and front-end engineering design) is compelling, both companies could be well-positioned for follow-on, ongoing services throughout the life of a project. 

Integrating resilient infrastructure know-how

More frequent and damaging weather events like hurricanes and flooding heighten the interest in working with or strategically acquiring firms with environmental services capabilities, including weather-related disaster mitigation and asset recovery. E&C firms are also being enlisted in building renewable energy facilities, such as wind or solar farms. For example, a Nebraska-based construction firm completed more than 50 solar projects in North America in the last 15 years.

The Infrastructure Investment and Jobs Act will likely favor companies with ESG capabilities and track records.

The Act, which places a heavy emphasis on sustainable civil infrastructure, earmarked $550 billion in new planned spending to upgrade existing infrastructure and support a transition to a cleaner economy. The Act is likely another driver of E&C firms to expand their ESG capabilities and solutions via acquisitions. The array of investments – including upgrades and modernization of clean water, rail, roads and bridges, and even the build-out of a national electric-vehicle charging infrastructure – could be a boost for E&C enterprises positioned to contribute to targeted projects.

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