Long read: Delays spell disaster for RCR

On November 22, 2018, RCR Tomlinson appointed McGrathNicol as administrators, with the company’s board having concluded that it could no longer secure ongoing funding and had to be wound up. Almost exactly one month earlier, the company had raised $100 million (US$71.5 million) in equity, from both retail and institutional investors. These shareholders are now facing little prospect of ever seeing their money again.

“We’ve never seen a turnaround like this,” Allan Gray Managing Director Simon Mawhinney told the Australian Broadcasting Corporation, on the day of the company’s collapse. “After the $100 million they raised, they allegedly had AU$140 million of net cash and a seemingly bulletproof balance sheet.”

So, what happened to the cash? The first, most obvious failing of the RCR Tomlinson solar business involved two projects in the state of Queensland. The company publicly set out the problems, which amounted to insufficient or faulty geotechnical analysis of the sites, resulting in a $57 million write-down of both projects. But this alone was not sufficient to bring a major diversified construction business unstuck.

Razor thin

The large-scale solar EPC business has notoriously tight margins. According to IHS Markit analyst Josefin Berg, global EPC benchmark costs are around the $1/W range. It appears that Australian prices, as reported by industry insiders, are around this mark. And EPCs with large, diverse, and international project pipelines can have an advantage.

“The key for successful EPC companies lies in scale,” says Berg. “Larger portfolios lead to better procurement conditions and reduces overheads.”

RCR solar

In Australia’s fast-growing large-scale solar marketplace, it initially seemed that RCR was onto a winner. It picked up a huge pipeline of EPC contracts in a short period of time – having cut its teeth on the construction of the 53 MW Broken Hill solar plant, owned by major Australian utility AGL. The project was completed in 2015 with First Solar acting as EPC.

From that point on, RCR’s solar pipeline expanded rapidly to more than 12 projects. And as the pipeline of Australian large-scale projects swelled, competition became more fierce. However, here RCR had some additional advantages.

“Just look at the volume of projects they [RCR] won compared to everyone else: [It represented] a very large proportion of the overall [Australian] solar construction work,” says Tristan Edis, the Director of Analysis and Advisory at Green Energy Markets. “That volume would suggest that RCR was likely the cheapest bankable EPC provider – with a long track record of EPC work in Australia, which would’ve given it a strong advantage.”

A former employee of RCR Tomlinson’s renewables team, who was involved in its solar business and spoke to pv magazine on the condition of anonymity, says that it is a mistake to think that RCR undercut the competition on price.

“There are rumors we were underbidding – but in the end, we couldn’t win a bid compared to the international EPCs. I would like to say personally RCR was bidding reasonably, responsibly.” The RCR insider says that, speaking generally across projects, the company was working on EPC margins of around 10%, but that “other EPCs were coming in at 10% cheaper than us.”

With such tight margins, only minor hiccups can cause major headaches. And RCR project engineers soon found that module supply contracts prove flexible when it comes to execution.

“All of them, except for the U.S.-based module manufacturers, wanted to make amendments to a contract that was in execution: Change the shipping dates, the price,” says the former RCR employee. “[With PV modules] being a global commodity, it was forever interesting.”

Delays, damages

It was, however, delays to grid-connection and resulting damages payments to project owners that were to accelerate RCR Tomlinson’s demise. Over the last 18-24 months the Australian Electricity Market Operator (AEMO) and network service providers (NSPs) have been increasingly rigorous in ensuring that new generation assets do not stress the country’s notoriously “skinny” grid, which has resulted in numerous and at times lengthy delays to PV projects achieving full operation.

“More than the solar business [of RCR], the NSPs and AEMO had a big role [in the company’s woes]. When waiting to hit commercial operation, and depending on contract structure, the EPC only gets paid when the plant is fully operational,” says the former RCR employee. “Rather than waiting six to eight weeks, it became six to eight months. And when it’s $1 billion of solar projects, then you can imagine how much money was owed on the cashflow.”

Tristan Edis believes that damages RCR had to pay to project developers during such delay periods quickly piled up. The damages were incured in relationship to forgone revenues. Wholesale electricity prices remain high in Australia, and revenues from large-scale generation certificates (LGCs) large.

Edis reports that wholesale prices in 2017 and 2018 ranged between $70 and $110/MWh in Australia’s populous east coast states. LGCs during that time fetched a spot price of $80/MWh. “That’s around $180/MWh in damages. So, for a 100 MW project with a 30% capacity factor … you can see how these payments would have been the biggest killer.”

For IHS Markit analyst Josefin Berg, RCR should not have been left assuming all of the delay risk. “Completion delays should be handled wisely in contracts,” says Berg. “The risk for delays outside the control of the EPC would normally at least partly be taken on by the developer. RCR seems like it took on too much, without considering the risks.”

In a creditors’ meeting in December 2018, administrators McGrathNicol reported that solar project delays consumed “significant amounts of cash very quickly.” It tallied RCR’s outstanding debts at $630 million – $100-$250 million of which is owed to subcontractors and suppliers. The administrators have begun breaking up and selling various parts of its business. The solar segment has been wound up.