The most prominent climate change initiative is achievement“net-zero” emissions. Net-zero emissions initiatives aim to reduce GHG emissions from industrial operations, to the largest extent possible, and then offset any unavoidable GHG emissions through programs such as the planting of trees that remove carbon from the atmosphere. Many pledges to achieve net-zero emissions—by either governments or companies—target the years 2050 or 2070. While this may sound like a long way out, action in the short term is necessary to meet these goals. This is particularly true in the infrastructure sector, where large projects are planned, engineered, designed, and constructed over years or even decades.
Designing projects to meet corporate net-zero emissions targets and/or to address regulatory requirements associated with net-zero goals is particularly challenging for the infrastructure sector, given that a substantial portion of its emissions are released before an asset is even used. The production of materials accounts for 15–20 percent of building emissions and 50–60 percent of infrastructure emissions. This is why recent legislation in the United States has targeted the emissions profile of materials used in infrastructure projects and why the federal government is promoting projects that prioritize increased energy efficiency.
Many new requirements address the “embodied carbon” of construction materials and the construction process. Embodied carbon includes any carbon dioxide (CO2) created during the manufacturing of building materials, including material extraction, transport to manufacturer, and manufacturing. Embodied carbon also includes the transport of materials to the jobsite and construction practices used. Other examples are the CO2 produced from maintaining a building and eventually demolishing it, transporting the waste, and recycling such waste. Importantly, embodied carbon is distinct from operational carbon (which is used, for example, in heating a building). Consideration of embodied carbon in infrastructure projects—at least on a large national scale—is a new development.
Net-zero initiatives will require that companies involved in construction and infrastructure projects undertake new considerations for decreasing carbon emissions during all phases of a project including design, use (e.g., energy consumption), repair and maintenance, and end of life (e.g., demolition and waste versus recyclability). This will create challenges for an industry that has traditionally operated in a siloed manner with prescribed roles—owners finance, architects design, contractors build, etc. Nevertheless, the challenge posed by climate change requires unprecedented market transformation, which, in turn, will require new collaborations—starting with project design and material selection. As more owners incorporate emission reduction goals into sustainability targets and such targets are included in technical and contract documents, there will be new parameters to consider during a project’s construction phase. Product substitutions or value engineering proposals may be impacted. What was previously considered a technically equivalent material or equipment may not be accepted by the owner, and a substitution that achieves the same “construction purpose” may be unacceptable due to its higher embodied carbon emissions profile.
This article identifies some of the critical levers that will impact project development decision points and explores the infrastructure sector’s current efforts to achieve net-zero GHG emissions. Focus is given to the energy sector given its critical role in the net-zero transition. This article also provides commentary on some of the considerations that owners, architects, engineers, and contractors will want to consider as net-zero policies become more prevalent and begin to catalyze market transformation.
I. What Climate Change Initiatives Are We Talking About?
Net-zero and other climate initiatives support the overarching international goal to limit global warming to well below two degrees Celsius as compared to pre-industrial levels. This goal was set by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) at the 2015 UN Climate Conference (COP 21) in Paris. The “Paris Agreement” has been signed by 196 countries. To reach this temperature goal, countries need to achieve carbon neutrality by 2050.
Most G20 countries have pledged to achieve carbon neutrality by 2050 or 2070. According to the International Monetary Fund (IMF), achieving net-zero emissions by 2050 will require substantial infrastructure investments in the range of 0.5 to 4.5 percent of gross domestic product over the next decade. This will require both government and private investment, as well as risk sharing through insurance and guarantees.
Indeed, private investment is already pushing to align investment portfolios with net-zero emissions goals. In some cases, investment stems from environmentally conscious investors concerned about the implications of climate change, while in other cases, investment aims to “future-proof” economic value and investment returns of infrastructure projects that may be impacted by climate change forces, such as extreme weather (e.g., sea level rise impacting coastal infrastructure). Various initiatives are being developed to inform the market of which investments have the “best” net-zero profiles. For example, Moody’s Investor Services announced the launch of a scoring system for corporate net-zero pledges “aimed at enabling investors to evaluate and compare companies’ decarbonization plans and actions.” Infrastructure that does not account for resiliency needs or increasing demand for net-zero emissions capabilities runs the risk of becoming a stranded asset. Additionally, corporate decarbonization pledges continue to drive investment in infrastructure projects with reduced embodied emissions. For example, Salesforce has set a goal of 80 percent reduction in embodied carbon in its construction efforts by 2030 and to be net-zero by 2050. Additionally, Forbes recently recognized seven different real estate investment trusts (REITs) for their respective targets to reduce GHG emissions by 2050.
II. What Emissions Are We Talking About?
To assess how a company might be expected to achieve net-zero status, it is first important to understand what types of GHG emissions are considered. The World Resources Institute’s “Greenhouse Gas Protocol” is a commonly used framework that places emissions into three categories: Scope 1, Scope 2, and Scope 3. Scope 1 emissions are direct GHG emissions originating from sources that the company (or government) owns or controls (e.g., a company’s fleet of vehicles). Scope 2 emissions are indirect GHG emissions that come from the generation of purchased energy, heating, or cooling, including the emissions caused when generating the electricity that powers a building. Scope 3 emissions are all other indirect emissions that occur in the value chain, including upstream and downstream emissions (e.g., the purchase of cement or disposal of materials that release methane as they decay).
Figure 1. Scope 1, Scope 2, and Scope 3 Emissions, Illustrated (See PDF)
These various direct and indirect emissions create challenges for infrastructure projects, including renewable energy projects. Consider a hypothetical offshore wind farm. While operation of the windmills will not require the use of electricity, the production of the windmill components requires carbon emissions and the construction of the wind farm—such as diesel-burning barges—can have significant emissions.
Enhanced government and private focus on these direct and indirect emissions means that an increasing number of construction projects will include consideration of how emissions reductions can be achieved through project planning, siting, design, and procurement decisions. For example, a project owner may choose to source steel that is less emissions-intensive in its production when developing a bridge. Or an architect may design a building with LED lighting or multistage HVAC units that reduce a building’s energy usage. However, this remains an emerging area of regulation and there are currently practical limits on the ability to reduce emissions, particularly embodied emissions. Emissions reduction in construction can be limited by multiple factors—the embodied carbon within the electricity and transportation sector; the current state of emission disclosure, including environmental product declarations (EPD) and limitations in the ability to compare products; the availability of technology to create lower-emission products; and constraints on supply chain and availability. As discussed below, incentives established by the federal government and other entities will play an important role in helping companies to overcome these challenges.
III. Why the New Focus on What Construction Materials Get Used on a Project?
A key construction material in the effort to achieve net-zero is cement. According to some estimates, cement production accounts for almost 8 percent of global emissions and 30 percent of building materials emissions. Behind concrete is steel, which accounts for approximately 25 percent of building material–related emissions. Energy use in the steel and iron industries accounts for almost 8 percent of total global energy demand.
Accordingly, achieving net-zero emissions in concrete and steel production alone presents substantial opportunities. Companies in the cement and steel sectors have already begun making net-zero pledges. Heidelberg, the fourth-largest global cement producer, has pledged to be net-zero by 2050. The Global Cement and Concrete Association has published a road map to net-zero concrete by 2050. And ThyssenKrupp, Europe’s second-largest steel manufacturer, has pledged to achieve net-zero by 2045.
There are also likely to be changes in the design of projects. For example, a design can be optimized to improve the longevity of concrete and its thermal efficiency, thus reducing the need for heating and cooling. Architects also might specify cement products that use alternative or supplementary cementitious materials (SCM), such as fly ash instead of clinker, which is the traditional binding element but also responsible for the majority of cement’s carbon footprint. Such a shift, however, would not come without drawbacks—SCMs can reduce the strength of concrete, which can impact construction schedule and cost.
One option that owners and architects may take is to use “performance-based specifications.” Under this option, an architect does not specify a particular product (or even a few products), but rather identifies a performance criterion that the contractor uses to identify a product that meets such criterion. For example, architects may specify the use of products with certain levels of “global warming potential” rather than specific products. A contractor bidding a project may have challenges ensuring that those performance criteria can be met (while also complying with other requirements such as Buy America on federal government projects) and face unanticipated costs when the specifications go above local code.
IV. What Is the Government Doing to Require or Encourage the Infrastructure Sector to Achieve Net-Zero?
A. Executive Actions
As the world’s largest buyer of goods and services ($650 billion annually), the US federal government wields considerable influence through purchasing decisions. This influence has been exercised through a “Buy Clean” policy, established through Executive Order (EO) 14057, Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability. The executive order targets net-zero emission from federal procurement by 2050 and expressly calls out concrete and steel as a focus. Yet, Buy Clean policies are intended to apply not only to federal procurement or federal buildings, but also to federally funded projects. The Department of Transportation (USDOT) is also considering Buy Clean requirements as part of its administration of billions of dollars in infrastructure spending.
B. The Inflation Reduction Act
The Inflation Reduction Act (IRA) of 2022 made significant investments in efforts designed to address climate change and promote domestic clean manufacturing—lauded by the Biden administration as putting the United States on a path to net-zero operational emissions from the federal building portfolio by 2045 and net-zero emissions procurement by 2050. The IRA appropriated funds to the USDOT Federal Highway Administration and the General Services Administration (GSA) to be spent on materials and products that “have substantially lower levels of embodied greenhouse-gas emissions associated with all relevant stages of production, use, and disposal, as compared to estimated industry averages of similar materials or products.”
1. Federal Buildings
The GSA owns and leases more than 371 million square feet of space in 8,600 buildings across the United States, including office buildings, ports, courthouses, and post offices. The IRA provided $3.375 billion for GSA to invest in federal buildings to help reduce carbon emissions and encourage innovation. IRA Section 60503 also provides the GSA with $2.15 billion for the acquisition and installation of construction materials and products with substantially lower levels of embodied GHG emissions as compared to estimated industry averages, as determined by EPA.
In 2022, the GSA announced a plan to acquire $2 billion of LEC materials. This GSA initiative spans more than 150 projects. The initiative was to procure $384 million of LEC asphalt, $767 million of LEC concrete, $464 million of LEC glass, and $388 million of LEC steel. In total, the administration expects that these purchases will reduce carbon emissions by 22,000 and 40,000 metric tons of CO2 equivalent. For context, EPA estimates that a typical passenger vehicle emits roughly 4.6 metric tons of carbon dioxide each year.
In addition to providing funding opportunities, GSA also developed an Interim IRA Low Embodied Carbon Material Requirements pilot program. The six-month program involved low embodied carbon materials being used for 11 GSA construction and modernization projects, including (i) construction of the US Health and Human Services—Food and Drug Administration Laboratory in Lakewood, Colorado, using LEC asphalt, concrete, glass, and steel; (ii) renovation of the Patrick V. McNamara Federal Building parking garage in Detroit, Michigan, using LEC concrete and steel; and (iii) the new paving on the World Trade Bridge Land Port of Entry in Laredo, Texas, using LEC asphalt, concrete, and steel.
As part of the pilot program, GSA required EPDs—which are like a product’s nutritional label, except for GHG emissions. This has the intention of signaling to the construction sector that EPDs will be required on federally supported projects, although there is an acknowledgement that some products do not yet have EPDs—again, a potential pitfall facing companies.
Starting in December 2023, GSA began publishing “findings and lessons learned” from the pilot program and continues to do so as new information becomes available. One critical finding was the importance of location in determining the technical suitability and economic feasibility of using LEC materials. For example, GSA observed that concrete and asphalt are not suitable for travel beyond approximately 90 miles. GSA also noted that flat glass—which was hoped to reduce 80 percent of emissions from current industry averages for glass—was not produced at levels that could meet that emissions target or performance and schedule requirements. Advancements, however, are quickly being made. For example, glass manufacturer Vitro Architectural Glass announced in May 2024 that all the flat glass it produces now meets the GSA’s 80 percent emissions reduction target. Further, an additional 17,000 EPDs have been published since the launch of GSA’s pilot program.
2. Transportation Projects
The IRA similarly provides the Federal Highway Administration (FHWA) with $2 billion to reimburse or incentivize the use of low-emissions construction materials in projects related to federal-aid highways, tribal transportation facilities, federal lands transportation facilities, and federal lands access transportation facilities. The program is designed to cover the difference between conventional materials and low-emissions materials.
DOT also has issued a policy statement on the Buy Clean Initiative acknowledging the federal government’s goal of reaching net-zero emissions economy-wide. DOT has said it will explore the use of EPDs, develop a Buy Clean policy based on EPDs to ensure that materials used in DOT projects are targeted toward net-zero, and prioritize education and research on embodied carbon emissions to be used in transportation infrastructure. However, according to the National Institute for Environmental Studies, an EPD can cost $40,000, which means many manufacturers have not yet developed EPDs and may not be incentivized to do so unless there is sufficient demand for low-carbon materials.
3. Construction Material Labeling
The IRA provided $100 million for EPA to work with DOT’s Federal Highway Administration and the GSA to develop and implement a program to identify and label construction materials and products with “substantially lower” levels of embodied GHG emissions. The funding is available through competitive grants, cooperative agreements, contracts, technical assistance, and direct federal spending.
Pursuant to this allocation, in December 2022, EPA issued an interim determination to provide the GSA and DOT (as well as other agencies) with actionable determinations on selecting materials and products that meet the standards of Sections 60503 and 60506. The interim decision is intended to allow the GSA and DOT to reduce GHG emissions of federally funded building, infrastructure, and construction projects. The interim decision focuses on the production phase of materials, as opposed to the use or disposal phase. EPA interprets “substantially lower” as materials or products that have a global-warming potential (GWP) that is in the best-performing 20 percent of similar materials or products. However, if no materials or products are available in the top 20 percent in a project’s location, then the top 40 percent is sufficient, and if nothing in the top 40 percent is available, then better than average is acceptable.
EPA is focused on concrete and cement, glass, asphalt mix, steel, and assemblies comprised of at least 80 percent of materials that qualify under the interim determination (by total cost or total weight). EPA also will consider reuse of products largely in their original form as qualifying under Sections 60503 and 60506. These reused products are minimally processed, salvaged, and reused, not traditionally recycled products.
Pursuant to Section 60112 of the IRA, EPA also has created a new grant program to support EPD verification and development. The program itself is an acknowledgment of the existing shortcomings regarding reliable emissions data for EPDs, as EPA’s description of the program stresses the importance of funding projects that “contribute new and/or improve critical data, analysis, or feedback for producing robust EPDs.” The IRA provides $250 million in funding for this grant program over the next five years, and EPA plans to issue up to 40 grants, cooperative agreements, and/or pass-through cooperative agreements in fiscal year 2024 alone.
C. Infrastructure Investment and Jobs Act (IIJA)
The Infrastructure Investment and Jobs Act (IIJA) was designed to increase investment in the United States’ infrastructure and manufacturing competitiveness. The IIJA also created several programs targeted at encouraging climate change mitigation and increasing the resilience of the transportation system. Projects including the use of sustainable pavements and construction materials that reduce embodied carbon during the manufacture and/or construction of highway projects can be eligible for “Carbon Reduction Program” funding, provided that a life-cycle assessment demonstrates substantial carbon emissions reductions compared to the implementing agency’s typical pavement-related practices.
The IIJA also established a climate challenge for quantifying emissions of sustainable pavements in order to quantify GHG emissions from materials and practices for the design, construction, and maintenance of pavements. Through the challenge, the FHWA identified more than 35 projects from 27 agencies and provided $7.1 million to 25 state departments of transportation. Participants in the challenge receive training and work with various stakeholders to implement projects that quantify the environmental impacts of pavements using life-cycle assessment and EPDs.
The IIJA also included the Build America, Buy America Act (BABA), which expands Buy America coverage to new types of infrastructure projects funded by federal awards, including electric power transmission facilities and broadband infrastructure. Further, the IIJA broadened Buy America product coverage to “construction materials” including nonferrous metals (e.g., copper used in electric wiring), plastic- and polymer-based products, glass (including optical fiber), and other materials (e.g., lumber and drywall). Generally, Buy America has not previously addressed construction materials, although the Buy America requirements for steel have impacted large construction projects. To be considered “produced in the United States” under the IIJA, a manufactured good, other than iron and steel, must contain greater than 55 percent domestic content. However, there are still waivers available for (1) public interest, (2) nonavailability, and (3) unreasonable cost.
The Office of Management and Budget (OMB) has issued guidance to support implementation of the various aspects of the BABA program. The guidance explains that the BABA domestic preference requirements apply to projects that are funded, in part or in whole, with federal awards. The guidance includes new requirements for construction materials, iron and steel products, and manufactured products to be considered domestic in origin and confirms that “all manufacturing processes” for construction materials must occur in the United States. However, and in concert with an OMB warning regarding the complexity of the statute, there are various exceptions. For example, wet concrete is exempt from the Buy America requirements while precast cement is subject to the 55 percent domestic material test.
V. State and Local Level Efforts to Reduce Emissions
While the federal government’s new legislative and regulatory initiatives provide a critical source of funding to drive the decarbonization of construction operations, state and municipal governments also play a significant role in this effort. In particular, states and municipalities with an eye toward decarbonizing the economy more broadly are beginning to leverage their regulatory authority over buildings through building codes, engagement with developers, and, in some cases, mandating all new buildings be net-zero.
For example, in November 2021, the city council of Ithaca, New York, voted to electrify and decarbonize 100 percent of the city’s buildings by 2030. This ambitious plan requires full electrification of 1,000 residential and 600 commercial buildings, which the city estimates could cost $600 million. Energy efficiency and electrification technologies, such as heat pumps, feature prominently in the city’s plan. Interestingly, city officials suggest that the ambitiousness of its plan is also key to its success; retrofitting 1,000 buildings over a period of just a few years creates economies of scale and drives down the costs of materials and labor. As of March 2024, city officials reported that work completed on ten commercial and nonprofit buildings amounted to a total investment of $1.9 million, $1.4 million of which came from federal or state incentives. City officials expect to achieve a 30 percent reduction in overall emissions in the next year.
Given the interconnected nature of real estate, plans such as Ithaca’s could have impacts beyond the city limits. States and municipalities using their purchasing power and regulatory authority could accelerate the race to net-zero construction dramatically because purchasing power acts as a carrot and regulation functions as a stick. Much like the GSA’s efforts at the federal level, state and municipal governmental purchases of lower-carbon construction materials could help producers drive down costs while also increasing the scale of production for these products. State regulations, such as building codes and performance standards, also drive demand for lower and zero-carbon materials. The demand created by this local regulation has the potential to be much more dramatic than at the federal level, given that states and municipalities are directly and primarily responsible for promulgating, updating, and enforcing building regulations. Moreover, builders who are required to comply with lower-carbon construction requirements in one jurisdiction could begin to use the same lower and zero-carbon materials in other jurisdictions in which they operate, especially if the next jurisdiction is engaging in similar initiatives.
A. State-Level Climate Commitments
The US Climate Alliance is a bipartisan coalition of governors committed to reducing GHG emissions consistent with the goals of the Paris Agreement. Each member state committed to four actions:
- Reducing emissions. Reducing collective net GHG emissions by at least 26 to 28 percent by 2025 and 50 to 52 percent by 2030 (both below 2005 levels), and collectively achieving overall net-zero GHG emissions as soon as practicable (but no later than 2050).
- Accelerating action. Accelerating new and existing policies to reduce GHG pollution, building resilience to the impacts of climate change, and promoting clean energy deployment at the state and federal levels.
- Centering equity. Centering equity, environmental justice, and a just economic transition in their efforts to achieve their climate goals and create high-quality jobs.
- Tracking progress. Tracking and reporting progress to the global community in appropriate settings, including when the world convenes to take stock of the Paris Agreement.
Currently, 25 states and the District of Columbia have established economy-wide GHG emissions targets. The Alliance represents approximately 55 percent of the US population and 60 percent of the US economy. The members of the coalition are shown in Figure 2.
Figure 2. Members of the US Climate Alliance (see PDF)
States that have made carbon reduction commitments are monitoring progress to those targets and enacting policies to support GHG reduction. If states fall short of interim reduction targets, it is possible that they would enact more stringent policies and regulations to incentivize more aggressive action or address barriers to progress. This landscape will continue to evolve over the next decade.
Many municipalities are taking action and either have committed to, are developing, or are implementing a climate action plan. The Zero Energy Project tracks the cities with climate action plans. As of November 2023, there were more than 400 local jurisdictions on the list.
B. States and Municipal Leadership: Building Energy Performance Standards
With respect to existing buildings, building energy performance standards (BEPS) are energy performance requirements that existing buildings must meet over time. This is a tool to decarbonize buildings through reduced energy usage and emissions. This is an emerging area of the law, with the following jurisdictions having already adopted BEPS: the District of Columbia; New York City, NY; Boston, MA; Washington State; St. Louis, MO; the state of Colorado; Denver, CO; the state of Maryland; and Montgomery County, MD. A summary of BEPS adopted by these governments is set out in Figure 3. The programs enacted by these states and cities typically include a benchmarking period coupled with a several-year period within which the covered buildings are to reduce emissions to meet the identified minimum threshold performance.
Figure 3. Summary of Jurisdictions that Have Adopted Building Energy Performance Standards
The Biden administration put together a coalition of 33 state and local governments that committed to design and implement BEPS policies. These jurisdictions, shown in Figure 3, represent 20 percent of the nation’s building stock and span from coast to coast.
For commercial and multifamily buildings that are larger than 25,000 square feet, compliance with this emerging area of the law will be a key issue to address. While there are likely some energy reductions that are achievable from changing occupant behavior, these policies are expected to require retrofit and/or renovation of older, less-energy-efficient buildings.
C. New Construction and Promoting Building Electrification
Building electrification and decarbonization policies are being discussed by cities and states across the country. These policies transition away from onsite fossil fuel combustion toward highly efficient, 100 percent carbon-free sources of energy. Some jurisdictions are interested in requiring all-electric construction, while other jurisdictions prefer electric-ready or electric preferred options for new construction. The International Code Council (ICC) 2021 International Energy Conservation Code provides model language. Additionally, the New Buildings Institute has published draft amendments to implement these changes in existing code.
As an example of these policies, in 2022, the Maryland legislature enacted the Climate Solutions Now Act (SB 528), which mandates a reduction in the state’s GHG emissions by 2031 relative to 2006 levels and net-zero GHG emissions by 2045. The Act also includes a requirement to transition to an all-electric building code and supports moving toward broader electrification of both existing buildings and new construction as a component of decarbonization. In December 2023, the Maryland Department of the Environment also released its climate pollution reduction plan to detail policies and initiatives for achieving its net-zero commitment. These state programs build on the Biden administration’s December 7, 2022, rule, issued by the US Department of Energy, that orders all new and refurbished federal buildings to become fully electrified by 2025.
Not all jurisdictions, however, are moving toward electrification. A dozen jurisdictions have policies in place that prohibit or discourage fuel switching. Figure 5 identifies the status of fuel-switching policies nationwide.
Figure 4. Fuel-Switching Policy Status by State (See PDF)
The construction code adopted by a jurisdiction also impacts the energy use of the building. Figure 5 outlines the national average energy use reduction in model energy codes from 1975 to 2021. The figure shows a trend toward more efficient codes, although there have been instances of lost efficiency from code to code along the way.
Figure 5. Estimated Improvement in Residential and Commercial Energy Codes (See PDF)
D. State-Level Low-Carbon Procurement Initiatives
State-level initiatives to procure low-carbon construction materials long predate the recent Biden administration executive actions. For example, in 2017, the California legislature enacted the Buy Clean California Act. The legislation targets embodied carbon emissions of materials used in construction of state infrastructure projects and on concrete reinforcing steel, structural steel, flat glass, and mineral wood insulation board. The legislation also requires contractors to submit Environmental Product Declarations as part of their bids to supply materials for state infrastructure projects. To assist with this effort, the California Air Resources Board (CARB) has promoted the availability of EPA grant funding for EPD development, demonstrating how state and federal decarbonization efforts can often buttress one another.
VI. What Is Required to Meet Various Climate Change Initiatives and How Is the Private Sector Responding to the Net-Zero Goal?
Procuring clean electricity is critical to the infrastructure industry’s push to achieve net-zero. For example, if a new residential building installs electric heating and cooktops, but the electricity still comes from fossil fuels, the building is unlikely to achieve net-zero, particularly with respect to Scope 2 and Scope 3 emissions. The same is true for a hypothetical new way of making steel that may rely on electric kilns instead of coke furnaces. To this end, evaluating the state of a changing electricity grid is critical to understanding the feasibility of achieving net-zero construction operations.
As the US energy ecosystem continues evolving, megatrends compounding challenges of an already-complex electric sector are stoking an urgent call for changes. With more companies and communities pursuing clean energy and transportation solutions to serve their near-term decarbonization goals, the need is growing for practical, tactical solutions with expanding scopes and ambitions.
Only a few years ago, the market had a competitive balance of engineering, procurement, and construction (EPC) providers capable of meeting market demand with some capacity to spare. Today that excess capacity is gone as declining participation in the EPC market has been driven by increased risk, lack of performance, and resource constraints. This has led to higher demand for the remaining top-tier EPC providers in a market that is experiencing historic growth.
This current competitive balance represents a new era in the development of critical human infrastructure because it is causing a reevaluation of how much risk EPC contractors are willing and able to take. Today, EPC contractors find themselves in a position to pick and choose the projects they will add to their portfolio of work because the dynamics around securing these jobs—from concept to completion—require a new level of experience and sophistication in terms of managing an increasingly complex set of dependencies related to financing, incentives, insurance, supply chain, and employment of qualified professional services and tradespeople.
It is unrealistic to expect that EPC contractors alone will take on this massive additional risk to meet the current historic need for infrastructure development, especially for those aspects of a project that are outside the contractor’s control. This is quite different from the historical precedent in the EPC market. The scale of what needs to be accomplished in the power sector over the next decade is unprecedented; the only thing that may compare is the Works Progress Administration of the 1930s.
Currently, there are 20 to 30 gigawatts of renewables online per year, which is driving the need to overhaul the nation’s grid system in what is known as the “Great Interconnection.” This is a massive undertaking that, while incentivized by the federal government, is being left to the private sector to organize and prioritize. The risk associated with this work and the need to be technically savvy when it comes to planning this out is truly a generational challenge and opportunity.
The Great Interconnection ensures the nation’s sprawling electrical transmission and distribution network will be up to the tasks of, among other things, handling ever-increasing renewable energy; the volatility of floods, droughts, and wildfires fueled by climate change; and the electric vehicle (EV) segment’s growing appetite for electrons.
In many ways, modernizing is a matter of money, with utilities searching out the most cost-effective ways to decarbonize their energy portfolios. Federal legislation signed into law in recent years is meant to ease the burden, devoting a generational influx of billions of dollars in available funding and tax credits to upgrade the grid. Only now is this infusion for such things as climate mitigation, clean energy projects, and other zero-emissions technologies beginning to flow into the market.
A. Renewables and the Grid
As the infrastructure industry knows, renewable energy is on the march. In March 2023, the US Energy Information Administration (the federal government’s primary keeper of energy statistics) reported that US electricity from renewable sources (largely from wind, sun, and hydropower) surpassed coal-fired generation for the first time.
Renewables outranked nuclear power generation in 2022 for the second consecutive year as energy from coal continued its slide; coal decreased in share from 23 percent in 2021 to 20 percent one year later due to the increase in retirement for some coal-fired power plants and simply less use from those that remain. By 2050, the EIA forecasts solar and wind power will account for 40–69 percent of US electricity generation.
Fanning the growth of renewable energy in recent years has been the sizable drop in the cost of producing wind and solar power (including the decline in the price of solar photovoltaic cells) as well as customer decarbonization goals. This growth, while exciting, comes with its own challenges, as EPC contractors strive to add gigawatts of renewables to the grid each year for the foreseeable future. Additionally, the rapid build-out of renewable power generation requires a complementary investment in grid modernization.
B. Resilience and Reliability: The Need for Grid Modernization
The US electric grid is an engineering marvel, with thousands of electricity-generating units and a web of hundreds of thousands of miles of transmission and distribution lines powering millions of homes and businesses.
This breadth involves complexity, which invites questions about the aging grid’s resilience and reliability—concerns amplified by outage-causing extreme climate events, greater load demands for a rapidly expanding EV segment, and the proliferation of such things as energy-intensive cloud computing and data centers.
All of this has fueled a growing sense of urgency to modernize the grid. The issue presently facing the industry is choosing the path forward; utilities, original equipment manufacturers (OEMs), EPCs, and regulators grapple with fundamental operational shifts as they integrate renewable energy and distributed energy resources (DER), new data-rich sensors and systems, and greater levels of electrification of transport and industry. To modernize successfully, grid owners and operators must first understand and systematically address a multitude of risks and vulnerabilities, some of which are escalating threats.
Grid operators today are embracing regular and objective assessments of risks, often uncovering problematic vulnerabilities—through methods such as hiring external parties to test a system’s physical, information technology (IT), and operations technology (OT) defenses. Best practice assessments incorporate a broad view across the portfolio of generation facilities, transmission and distribution infrastructure and grid operations, telecommunications infrastructure, and interconnected infrastructure as well as assessments of the supply of fuels. Assessments also must consider third-party DERs and associated control devices.
The increased deployment of microprocessor-based technology across infrastructure is pushing incumbent systems to evolve on an as-soon-as-possible basis. Energy asset owners must be mindful that the greater the technological dependency, the more operators must know how to detect, circumvent, and rapidly respond to threats to reliability and resiliency. This can be achieved via grid technology, communications, and advance investment to mitigate the probability of occurrence and its associated costs, from both internal and external conditions.
Whether adopting technological advancements, mitigating against climate change, assessing cyber threats, or addressing specific weather-related impacts such as winterization, tropical storms, or wildfire risks, asset owners and operators must calibrate vulnerabilities and risks. To do this, owners and operators must perform a quantitative analysis that identifies and documents the critical and innovative grid modifications and upgrades required to reduce the primary threats to system reliability and resiliency.
Importantly, however, embracing grid modernization and building resilience come at a cost. That cost must be balanced and prioritized against the backdrop of relevant regulations and standards, recognizing that grid modernization is a journey requiring an integrated planning, deployment, and operation approach.
C. Meeting Heightened Electrification Demands
Fueled by the Biden administration’s goal of net-zero emissions by 2050 and increasing calls to electrify the grid more rapidly to power EV fleets and passenger cars, electricity demand by 2035 is expected to increase 38 percent from 2022 levels. Transmitting high-voltage electricity to major cities across the nation will require costly transmission infrastructure upgrades, replacements, and new buildouts. To address that concern, the IIJA included a $73 billion commitment to grid improvements, including thousands of miles of new, resilient transmission lines to help expand access to power generated by renewable technologies.
Along with the anticipated acceleration of electrification and associated expansion of grid infrastructure comes a worthwhile reexamination of the importance of DERs to a decarbonized future—for example, using excess power from rooftop solar panels, household battery storage systems, and wind generation units owned by utilities’ customers.
The increased deployment of DERs is being accelerated by several dynamics. Full decarbonization cannot only be met by retiring old fossil-based supply-side (wholesale) generation assets and adding renewable generation assets to the mix; DERs will be key to unlocking carbon reductions on the demand side (retail) as well. Moreover, the interconnection queue for wholesale projects is becoming longer. The typical duration from connection request to commercial operation increased from less than two years for projects built between 2000 and 2007 to nearly four years for those built from 2018 to 2022, with a median of five years for projects built in 2022, according to the Lawrence Berkeley National Laboratory in April 2023. Finally, DERs are being incentivized through wholesale market design, such as FERC Order 2222, which allows for DERs to participate in regional wholesale electricity markets, as well as targeted tax credits, grants, and loans.
These incentives are already yielding results in the market. In February 2024, Vineyard Wind 1, located off the coast of Martha’s Vineyard in Massachusetts, became partially operational. Once fully completed, the project will have 62 wind turbines that will generate renewable energy for more than 400,000 homes and businesses in the area, while reducing carbon emissions by more than 1.6 million tons per year.
Perhaps a more compelling case for the future importance of DERs is the significant increase in the number of utilities now providing this service to their customers. But no matter the technology, source of funding, or infrastructure challenge, most power-sector stakeholders need immediate economical solutions to decarbonize the US power system, marking yet another market driver of increased demand for qualified EPC contractors.
D. The Role of Gas in the Global Energy Ecosystem
The increasingly competitive landscape for qualified EPC contractors is being driven by investment in renewables, nuclear, and other new energy solutions as the world moves toward zero-emission and sustainable energy sources. However, during this period of transition, the market also is seeing additional demand for reliable, cost-effective fossil fuel energy sources. This is where liquefied natural gas (LNG) is being advanced as a leading reliable baseload fuel during the transition to a low-carbon future.
LNG can be efficiently and economically shipped around the world. For decades, global LNG trade has moved natural gas from wellheads to demand centers using facilities that supercool the gas to very low temperature converting it into a liquid that is then stored in cryogenic tanks. Specially designed carriers with insulated tanks then ship it to destinations anywhere around the globe where the liquefication process is reversed through vaporizing—called regasification—to convert the LNG into usable natural gas.
Whether LNG is used for power generation, transportation, or industrial applications, it remains a cleaner-burning fossil fuel that improves energy efficiency, reduces emissions, has a lower cost of carbon capture, and enables renewable energy integration. Still, as a commodity, natural gas is subject to price volatility brought on by social, economic, political, technological, legal, or environmental factors.
Recently, these forces of volatility have caused disruptions in the energy market and led to wide swings in pricing. Nonetheless, as the world pursues net-zero and zero-emission energy, it is important to strike a balance between this pursuit with the need to sustain the safety, security, and convenience that is the bedrock of our economies and communities. Countries with a single dependency on natural gas require alternative solutions for accessing available fuel to prevent interruptions in service to the homes and businesses that rely on it.
This represents yet another driver of demand for qualified EPC contractors in today’s growing market for power infrastructure. Asset owners and OEMs alike are looking to EPC partners to play a more active role in assessing investment decisions regarding the type of LNG infrastructure needed to support energy resilience around the globe. And these decisions must prioritize proven technologies that enhance the portability and mobility of natural gas.
E. Hydrogen Poised to Provide Tomorrow’s Green Energy
Given the undeniable migration to cleaner sources of power across the utility and industrial sectors, the role of hydrogen in the equation is drawing mixed perspectives as technology evolves. Although the IRA has encouraged carbon capture and “green” hydrogen production that is electrolysis with renewable energy resources, some utilities are beginning to realize just how expensive and long horizon (mid-2030s or later) those projects might be before coming online.
Hydrogen is generally considered viable as a long-duration energy storage option, indicating cautious optimism surrounding use of the technology, even as utilities compare it to other more economical generation and energy storage options, all similarly backed by the IRA. The less-expensive technologies are appealing to utilities facing imminent clean-energy mandates—as well as pressure from stakeholders—to make investments that achieve decarbonization goals now and beyond.
Despite these lingering questions, there remains expectation that hydrogen will play a meaningful and lasting role in the world’s energy portfolio as it grows stronger through transactions such as Chevron’s acquisition of Magnum Development’s stake in the Advanced Clean Energy Storage (ACES) hydrogen hub in Delta, Utah. Chevron is partnered with Mitsubishi Power Americas on ACES, which is located next to the Intermountain Power Agency’s IPP Renewed Project and supports an 840-megawatt, hydrogen-capable gas turbine combined cycle power plant operating as a renewable energy storage hub providing more than 300 gigawatts (GWh) of clean energy storage.
The project represents a working model likely to become more common, where you have a primary investment partner paired with an OEM, who then selects a qualified EPC contractor to oversee the feasibility, design, and construction of these large-scale, first-of-their-kind projects.
F. High-Impact, Low-Frequency Events Are Widely Recognized
Although the grid impact differs across geographies, extreme weather events—from Texas ice storms to North Carolina hurricanes to California wildfires—are widely accepted as grid-impacting emergencies that demand the attention of the power and utility industries. Over the past decade, the frequency and impact of extreme weather events have increased, with such events now deemed essentially inevitable. The ability of the energy system to better absorb impact and recover more quickly in the wake of these occurrences is a significant part of the investment impetus for bolstering system resiliency.
Utilities are responding accordingly by prioritizing climate resiliency in their capital expenditure (CapEx) and operating expenditure (OpEx) planning. However, this importance is tempered by the fact that this is yet another burden on already-strained resources. This is where the industry is seeing risk management and burden sharing coming into play across the public and private sectors as these increasingly necessary investments must be made to address the increasing social, economic, and legal impacts coming from more frequent and devastating climate disasters. In the world of risk management, this is no small matter.
G. Navigating New Supply Chain Dynamics
Despite the end of the pandemic, procurement challenges—supply chain issues—are still rampant due to the sheer volume of construction work across the globe. The delay in project start-ups and completions is evident particularly among grid modernization projects.
Drilling deeper, there are similar headwinds related to companies’ inability to obtain firm pricing on critical components, project financing, and their concerns with equipment delivery. This has created a scenario in which risk and opportunity inherent in procuring these critical components are in a state of flux, which underpins these headwinds.
The good news is there are several meaningful steps available to mitigate these impacts. The end goal is to have a dynamic plan that builds resilient, robust, and engaged supply chains for practical applications. Thinking broadly across multiple supply chains is the new normal when it comes to preparedness. Based on experience, there are five key steps to managing the new supply chain dynamics:
Map out your complete supply chain, then map out the suppliers’ supply chain. This is an important tool to identify gaps or potential problems. Find out what transport networks suppliers depend on to see if they share some of the same transport pipelines across truck, rail, and barge carriers. Dig into the backup power generator capacity of your suppliers, and your suppliers’ suppliers, for that matter. Look at their backup fuel supply planning and how much of their footprint is covered. Be prepared to go deep into multiple chains if appropriate. Work with key suppliers to understand cost and delivery impacts, strengthening relationships as well as terms and conditions. The framework for this mapping should be created in a way that makes it easy to update and adjust as you learn more.
Put the plan into action—do not just create a desktop exercise. Once a few potentially good backup suppliers are identified, it is time to actually make a purchase from them to ascertain how quickly they can deliver if you need to factor in sourcing contingencies. This does not have to be a large order, as even a more moderate purchase gets them in your accounting system, establishes a real-life business relationship, and allows you to see if there are quality issues to deal with ahead of time. Be open with them in discussing your supply chain needs and establish regular touch points to stay engaged.
Digitize your planning and make it visible to all key players involved. Replace silos with cloud-based planning software to increase visibility and engagement. Make sure all leaders and department heads have access to it and understand its purpose. Organize it intuitively, update it regularly, and notify key personnel of the latest changes. Consider prioritizing ongoing software training to ensure all key personnel can access the information they need.
Form a team with true authority to make quick decisions. Supply chain disruption is not solely a procurement issue; rather, it is an enterprise-wide challenge that is very real, with potentially millions of dollars at stake. Therefore, buy-in and active participation from all leadership departments are paramount. Integrate broadly and get other key departments involved. They may have some contingency plans of their own, but the details may not be more widely shared. This is the time and place to share that vital information. Make sure you identify by name the people who own the process within each group.
- Department: This group likely has plans in place for cyberattacks and malware, but how visible are they? Find out how much of your IT is cloud-based and how much is dependent on on-site servers or storage.
- Finance: Discover how quickly you can get an emergency purchase order approved and the chain of command that needs to be followed.
- Human Resources: Find out about the process for canceling a shift or how to quickly add personnel if the situation warrants.
- Public Relations: This group already may have a crisis communications plan in place. Ensure you have a solid process for communicating with employees in an emergency, as well as issuing any public advisories.
Make contact now with public entities and build sources for the most accurate local and national information. Take the time in the earliest stages to identify solid and trustworthy sources—especially local ones—and discover what information they can provide in a time of crisis. These can be government entities, industry organizations, or local nonprofits. By making contact proactively, you will be armed with the best information possible to protect your chain and your employees.
H. Meeting Demand with Limited Workforce
As the market for decarbonized, reliable, and resilient energy infrastructure continues to grow in the face of rising global instability, higher cost of capital, and increased risk related to persistent and growing impacts from climate change, the demand for qualified professionals and tradespeople is also outpacing the available talent pool.
A confluence of factors contributes to this growing imbalance in the market. One factor is an aging workforce preparing to exit the labor market, a dynamic accelerated by the COVID-19 global pandemic. As this trend nears its conclusion, the industry is grappling with ways to backfill this manpower and, more importantly, the industry and institutional knowledge this group of workers possesses. Availability of talent—as well as a tight job market—is cause for concern as well. As the globe commercializes newer, more complex systems and advanced technologies, the construction and engineering industries need workforces that are both more specialized and generalist. In other words, the industry finds itself having to do more tasks with less labor, pushing the industry to look more closely at innovative solutions such as automated construction equipment with artificial intelligence and machine learning capabilities. This is still a nascent trend and begs the question, is this burden shifting the labor shortage from one industry (engineering and construction) to another (technology and data science)?
Regardless of the answer, to meet the growing need for renewables and a modernized grid, a pipeline of trained workers is needed across the spectrum of roles that include project managers, engineers, salespeople, technicians, installers, system designers, operations managers, executives, and a variety of business professionals. Roles involving construction, field service maintenance, electrical work, and often sales, to name a few, are some of the fastest growing in the industry, and some of these roles will not necessarily require a college degree.
In general, these workforce needs are categorized in terms of time horizons:
- Short-Term Needs: Address immediate recruiting, training, apprenticeship, and career development needs, with a focus on reaching diverse, underserved communities and expanding the size of the workforce.
- Medium-Term Needs: Attract future potential employees to engineering and construction by introducing concepts, hands-on construction experiences, and career pathway opportunities at high schools, vocational/trade schools, and community colleges.
- Long-Term Needs: Bring awareness of the energy industry as an attractive industry for career consideration to elementary and middle school students. By 2030 to 2035, these students will be the newest workforce entrants up and down the energy value chain.
VII. ESG Is an Evolving Area of Law Raising New Considerations for Construction Contracting with Acute Implications for Energy Project Developers
Many of the challenges facing the construction sector, including EPC contractors, in reaching net-zero are addressed in corporate environmental, social, and governance (ESG) policies. ESG policies encompass an array of corporate performance evaluation criteria that assess a company’s focus on and ability to effectively manage environmental and social impacts of its business. Firms have long been addressing leadership in engineering and environmental design (LEED) certification (buildings that use less energy and water, utilize renewable energy and fewer resources, and create less waste), but these efforts go well beyond those of LEED. In contrast, capital carbon—emissions arising from the construction and production stages—includes all direct emissions from the construction processes as well as indirect emissions stemming from production of materials and components, has less been less of a focus.
With respect to the infrastructure industry, climate change may have physical impacts that alter the ability of assets to perform their intended role. For instance, if more intense storms occur, this may cause greater damage to physical infrastructure than anticipated. It also may cause delays to construction projects, particularly in certain geographic regions where extreme weather is severe. By way of another example, a chemical manufacturing facility located in an area increasingly prone to flooding may have a greater likelihood of contamination releases and groundwater pollution. Another instance could be a highway being built in southern states that may suffer delays due to dangerously high temperatures.
The changing landscape and focus on ESG issues have prompted changes to owner-supplier codes of conduct and/or contract terms. A summary of the topics within the “E,” “S,” and “G” of ESG is provided below.
- Environmental: The governance issues related to the “E” include corporate climate policies, net-zero goals/commitments, energy use, waste, pollution, and natural resource conservation. The governance and reporting associated with the “E” is tied to an owner’s evaluation of any environmental risks a company might face and how the company is managing those risks. Obvious management and government considerations include direct and indirect GHG emissions. This includes the entire supply chain, management of waste, and compliance with environmental regulations.
- Social: The governance issues related to the “S” include the relationships with internal and external stakeholders: employees, consultants, subcontractors, and the community. This includes workplace conditions, the health and safety of employees, and the promotion of ethical and socially conscious themes including diversity, inclusion, community focus, and social justice. This also includes corporate ethics fighting against racial, gender, and sexual discrimination. Human capital is targeted to employees, and social capital includes other stakeholders like customers, suppliers, and the community.
- Governance: The governance issues related to the “G” include the standards that ensure a company uses accurate and transparent accounting methods, pursues integrity and diversity in selecting leadership, and is accountable to stakeholders. This category includes process, procedures, and governance of all types of risk, including technical, financial, reputational, regulatory, and legal risk.
Thirty years ago, businesses had limited incentives to concern themselves with “green solutions” or sustainable products and services. That was before climate change became a top-of-mind topic for both customers and employees. People often want to buy from companies making real efforts to minimize their carbon footprint. Consumers expect brands to embrace environmentally friendly tactics for business operations. Furthermore, in recruiting and retaining talent, the younger generations often want to work for organizations that prioritize green practices. The issues are mapped in Figure 6 as they relate to traditional elements of project controls.
Figure 6. Overview of ESG Issues Related to Project Controls
As reflected in ESG policies, the C-suite is more focused than ever on decreasing energy and resource consumption, while also launching initiatives to encourage greener practices and standards for a sustainable future. As a result, some players in construction are evaluating their business practices from a framework of sustainable business.
VIII. Conclusion: Net-Zero Goals Present Challenges for the Infrastructure Sector but Also Substantial Opportunities for Those Prepared for the Transition
Both the construction and energy sectors are at a unique and complex moment in history, where the confluence of challenges posed by climate change and the vast world of new government incentives demand agility and adaptation to a rapidly changing business and regulatory environment. The pressure to achieve net-zero emissions comes from numerous sources; government-imposed requirements, investor portfolio preferences, and public pressure to address climate change are all causing a shift in how companies evaluate their operations and GHG emissions footprint.
From decarbonizing our sources of power generation to optimizing the integrated grid that carries the electrons to the homes and businesses that need them, we are striving to answer the call for reliable, resilient, and sustainable energy. And as we pursue an “all of the above” strategy to achieve this goal by 2035, the demand for competent and well-capitalized EPC contractors is likely to persist, if not increase, for the foreseeable future.
One of the critical challenges with the adoption of low-emission construction techniques and materials is how various construction players will communicate and which parties will have the ultimate responsibility to ensure a project meets any net-zero goals. This will involve architecture, engineering, and construction firms and include project procurement and material production. It also will involve project sponsors, including governments (federal, state, and local) and private owners.
To meet this increasing demand, there needs to be a new paradigm for contracting agreements, regulatory frameworks, and financing models, all aimed at finding a more balanced risk profile so the work can get done safely, on time, and on budget. The infrastructure sector will need to be well-versed in net-zero-focused EPC and must be willing to reshape itself as the energy transition continues to evolve.