As industry players race to meet increasingly ambitious net-zero emissions targets, it’s clear that capital expenditure costs need to be reduced while project timelines are accelerated. This is particularly true for the construction of gigafactories, which are critical to hyperscale the green technologies needed to meet climate targets by 2050, including renewable energy sources, hydrogen, batteries, and carbon capture, utilization, and storage (CCUS).
Our estimates show that achieving carbon reduction targets will require the equivalent of 7.5 percent of global GDP in green capital expenditures by 2030. In turn, this capital expenditure will play a critical role in setting future costs of products, ultimately determining 10 to 15 percent of the cost of batteries and an even higher percentage of the cost of green hydrogen and ammonia.
Given that players in new green tech sectors typically have no blueprint for factory and production process design, industry leaders can borrow recent insights from battery manufacturing to drive down costs. On this point, a fundamentally new delivery system for capital expenditures, known as the plant-as-a-product approach, can help players industrialize the end-to-end process of designing and delivering gigafactory projects.
By reducing both costs at the plant level and lead times for green capital expenditures, the plant-as-a-product approach can lower capital expenditure costs by 10 to 20 percent for the first plant, with ultimate capital expenditure reductions reaching as much as 75 percent.
Global investment in green technologies: An overview
Meeting the world’s decarbonization goals is a significant challenge in terms of both increasing capital expenditures and overcoming technological limitations. That said, the main types of investments being made today are related to hydrogen (green steel, hydrogen plants, and green ammonia), battery gigafactories, renewables, and carbon capture technologies, all of which are necessary to help reach decarbonization goals by 2050. In Europe alone, 30 battery gigafactories will be built over the next seven years to help meet rapidly increasing demand for electric-vehicle batteries.
In addition, companies around the world are planning to build hundreds of installations for hydrogen, many of which will be highly accelerated because of recent stimulus programs, such as the Infrastructure Investment and Jobs Act and the Inflation Reduction Act in the United States. As part of the former, the US Department of Energy has allocated $9.5 billion to fund clean-hydrogen hubs, electrolysis programs, and manufacturing and recycling programs. The latter offers a production tax credit of up to $3 per kilogram of hydrogen produced.
Hyperscaling green capital expenditures: Reducing costs while increasing efficiency
Delivering capital investments has always been difficult. The vast majority of projects do not meet their authorized schedules, and cost overruns can drastically exceed initial estimates. To successfully scale delivery of green capital expenditures, construction players need first to fully control cost and time budgets and then to embark on cost ramp-down curves, similar to those seen in batteries, solar, and wind (exhibit).
Most companies will need to embark on aggressive expansions that involve building multiple plants in parallel. As an example, battery producers will likely need to build four plants in parallel, all in different stages of construction, to keep pace with the required scale-up. By contrast, scaling hydrogen plants could theoretically require building as many as eight to ten in parallel, considering the ambitious plans of most hydrogen players.
That’s a very tall order. But it may be possible if companies deploy a plant-as-a-product capital expenditure delivery system, which would let them design and implement future ways of working across all capital expenditure projects globally—potentially yielding both short-term productivity gains and continuous improvement in the midterm. This system is built around three complementary building blocks: technical, management, and people systems.
Technical system
The first building block refers to fit-for-purpose technical tools and systems to help optimize fact-based decision making. Such systems can help owners optimize plant design by simulating the construction phase, as well as ramp-up and operations, through digital twins. For example, various scenarios and design choices that influence building and equipment capital expenditures can be simulated, such as the required capacity of individual pieces of equipment, layout of production lines, and infrastructure. To reach optimal cost levels quickly during the design stage, owners can test maintenance costs and other operating expenditures—including any impact on final cost, yield, and returns on investment—before construction begins. Furthermore, tool kits can be expanded with updated market pricing and resource availability to help owners make informed trade-offs in their design up to the point of start of construction.
Another example includes integrating the design, procurement, and planning processes via digital platforms. This can help ensure seamless operations among the relevant parties by preventing the procurement of materials based on outdated designs and the arrival of subcontractors at sites based on older work schedules.
With such tools in place, one European-based battery producer was able to reduce expected capital expenditure costs significantly by implementing an aggressive minimum-technical-solution approach during concept design, which challenged the required scope and technical requirements. For example, equipment footprint was reduced by eliminating nonfunctional spaces, compressing open spaces, and optimizing equipment paths. Overall, capital expenditure cost estimates were lowered by 50 percent by reducing unnecessary space in production areas, optimizing storage areas, and combining heating, ventilation, and air conditioning (HVAC) equipment, among many other initiatives.
Management system
Having the right setup and performance management is the second building block. A critical component of this is a performance management office at both internal (the owner organization) and external (suppliers and engineering, procurement, and construction [EPC] companies) levels. Here, steering meetings can be supported by live performance-management dashboards with KPIs across all stages of the project life cycle, allowing owners to rapidly identify obstacles—such as low construction productivity; slow delivery, checking, and updating of design deliverables; interface clashes between contractors; and a lack of available materials on-site—and intervene for course correction or decision making.
“SWAT” teams can also help debottleneck and drive performance. For example, a solar player implemented SWAT teams and lean performance management and also parallelized labor onboarding and ramp-up, which accelerated the schedule by 30 percent and improved productivity by 40 percent. In this case, crew-level task assignments, performance targets, and daily performance dialogues helped to rapidly improve issue escalation and resolution, and to accelerate issue-resolution cycles.
People system
The final building block refers to the required capacities and capabilities. Often, implementing a successful people system entails a culture shift: companies will need to embrace innovative change and break down silos to help create the mindset for implementing minimum technical solutions. This will likely require creating innovative roles at the central and project levels (such as a blueprinting team) and building internal EPC capabilities (such as capital expenditure controllers).
With these points in mind, a global battery cell manufacturer mobilized its best organizational capabilities by installing full-time project teams and, in turn, identified improvement potential of more than 70 percent for the business case for a pilot gigafactory. In response, core team roles were identified and defined across sites, and daily communication was implemented globally to increase the speed of decision making across capabilities and organizational functions. As a result, a team blueprint was formed to roll out the pilot approach across sites.
The challenges for green tech projects in the years to come are formidable. In addition, owners and operators must contend with various external pressures related to changing regulations and increasingly stringent climate targets. One thing that’s certain, however, is that industry players need to make bold decisions today to approach things differently. Taking its cues from cost reductions in batteries, solar, and wind, the plant as a product is a promising solution.
This article is part of a series covering capital deployment for a greener world. It follows “Capital projects are critical for a green future,” which was published on August 15, 2023.
