Construction Costs for New Power Plants Continue to Escalate: IHS CERA Power Capital Costs Index
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Costs have risen 130% since 2000; poised to rise higher in the coming year
CAMBRIDGE, MA (May 27, 2008) – The costs of building new power plants have more than doubled since 2000, according to the most recent IHS CERA Power Capital Costs Index (PCCI). The latest IHS CERA PCCI shows that the cost of new power plant construction in North America has risen 130 percent in the last eight years. A majority of this cost increase has occurred since 2005, with the index rising 69 percent since then.
The IHS CERA PCCI – which tracks the costs of building coal, gas, wind and nuclear power plants indexed to the year 2000 – is a proprietary measure of project cost inflation similar in concept to the Consumer Price Index (CPI). The IHS CERA PCCI now registers 231 index points, indicating a power plant that cost $1 billion in 2000 would, on average, cost $2.31 billion today.
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The latest IHS CERA PCCI indicates a one percent drop in the first quarter of 2008. However, the miniscule drop in the index does not signal a change in the long-term factors that have been driving up costs. The decrease was driven solely by one narrow factor—an easing of nuclear equipment costs as a result of market volatility which has been driven by high global demand. Recent results of the IHS CERA PCCI show that the costs for all other power plants, such as those powered by coal, gas and wind, continued to rise.
- Wind has shown the largest increase at six percent since the third quarter of 2007 and 108 percent since 2000 in response to increased demand for wind turbines which has pushed up equipment costs and time to deliver, and is compounded with increasing labor and construction costs.
- Gas has increased by three percent since the third quarter of 2007 and 92 percent since 2000. This has been driven by manufacturers’ response to increased demand for gas turbine costs, as costs increase and lead times continue to extend for equipment delivery. Additional escalation can be attributed to continued increases in labor, engineering and construction costs.
- Coal has increased in cost by 2.3 percent since the third quarter of 2007 and 78 percent since 2000. Strong international demand for boilers has sustained high cost levels. There has also been high demand for scrubbers in the United States as clean air provisions push utilities to retrofit their coal facilities in order to comply with the 2010 regulations.
“While the index has shown a small drop in the past six months, there are no signs that this is the start of a downward trend,” said Candida Scott, CERA senior director of cost and technology. “The fundamentals that have driven costs upward for the past eight years—supply constraints, increasing wages and rising materials costs—remain in place and will continue during 2008.“
Additional factors, such as rising prices for commodities such as steel, nickel and copper, could soon drive costs up further, added Paul Bachmuth, CERA associate director of capital cost power.
“Renegotiated prices for iron ore contracts and supply disruptions of coking coal raise serious concern for cost increases in steel in excess of 50 percent in 2008 if all costs are passed through to the end consumer,” Bachmuth said. “Combined with the escalating cost of diesel impacting transportation for all materials, the power industry is set to see costs rise higher in 2008.”
"Timely decisions on fuel choice—what type of power plants to build and when to build them—are critical to keep the lights on, limit power price increases and manage carbon emissions," added Jone-Lin Wang, CERA managing director of global power group. "Understanding what's driving the dramatic cost escalation will go a long way toward making efficient decisions,"
Continuing Pressures
Demand for new power generation facilities remains high worldwide, leading to continued tightness in equipment markets. Cost increases, supply issues and longer delivery times are exacerbated as manufacturers struggle to keep up with demand. The weakening U.S. dollar also increases the costs of global procurement for equipment and materials.
The number of engineers in the workforce is also declining as older workers retire and are not being replaced. The resulting shortages in plant design teams add additional delays to construction schedules. The current increase in construction for nuclear power generation and the dearth of experienced nuclear engineers in North America has been a key driver behind cost escalation.
Recent cancellations of proposed coal plants in the United States due to uncertainty over environmental regulations has provided some slowing in cost increases in the U.S. coal industry. However, international competition for coal boilers, particularly in Southeast Asia, is keeping the equipment order books very active.
Concerns over a looming U.S. recession and subsequent cut backs in residential construction have offered little relaxation to power construction. The residential slump does not free up the skilled workers required in the power industry and there is no overlap of the specialist metals and equipment required.
Energy Industry Capital Costs
The IHS CERA PCCI complements the IHS CERA Upstream Capital Costs Index (UCCI) and IHS CERA Downstream Capital Cost Index (DCCI) which measures the cost of construction of new oil and gas production projects such as platforms and pipelines and construction of new refineries and petrochemical plants. Both indices demonstrate the dramatic impact rapidly rising costs are having on the energy industry.
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About the IHS/CERA Upstream Capital Costs Index (UCCI)
The IHS/CERA UCCI tracks the costs of equipment, facilities, materials, and personnel (both skilled and unskilled) used in the construction of a geographically diversified portfolio of twenty eight onshore, offshore, pipeline and LNG projects. It is similar to the consumer price index (CPI) in that it provides a clear, transparent benchmark tool for tracking and forecasting a complex and dynamic environment. The UCCI is a work product of CERA’s Capital Costs Analysis Forum for Upstream (CCAF-U). The UCCI can be tracked on the IHS Index Web Site: www.ihsindexes.com. For information on the Capital Costs Analysis Forum for Upstream, contact Pritesh Patel at ppatel@cera.com.
About CERA (www.cera.com)
Cambridge Energy Research Associates (CERA), an IHS company, is a leading advisor to energy companies, consumers, financial institutions, technology providers and governments. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, MA, and has offices in Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City, Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo and Washington, DC.
About IHS (www.ihs.com)
IHS Inc. (NYSE: IHS) is a leading global source of critical information and insight for customers in a broad range of industries. Our customer product and service solutions span four major areas of information: energy, product lifecycle management, environmental and security. By focusing on our customers first, we deliver data and expertise that enable innovative and successful decision-making. Customers range from governments and multinational companies to smaller companies and technical professionals in more than 180 countries. IHS has been in business since 1959 and employs more than 3,000 people in 35 locations around the world.
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