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Components and construction materials for nuclear power plants scored the biggest run-up in costs, up 173% -- nearly tripled -- since 2000.

Costs to Build Power Plants - Pressure Rates Still Rise

REBECCA SMITH - May 27, 2008

http://online.wsj.com/article/SB121184813975221465.html

Construction costs for power plants have more than doubled since 2000, according to new index data to be released Tuesday, and inflationary pressures will continue to put the squeeze on electricity prices.

The findings are bad news for consumers and utilities alike, and help explain why power-plant development has become something of a quagmire in the U.S. -- with no type of plant emerging as a reasonably priced option that can meet rising demand for electricity.

The analysis comes in the form of a price index from Cambridge Energy Research Associates Inc., a research and consulting firm in Massachusetts that is a unit of IHS Co. Similar to the consumer-price index, it calculates the cost of building new power plants based on the cost of materials and other factors.

"Costs for labor, materials, equipment and design and engineering -- all are up," said Candida Scott, senior director of cost and technology for CERA. As a result, the cost of building new plants is up 19% from a year ago and up 69% from 2005.

The skyrocketing price tag comes as the world is roiled by surging electricity demand and as it weathers various supply disruptions, some caused by what appear to be changing weather patterns.

In all, CERA says, the construction of new generating capacity that would have cost $1 billion in 2000 would cost $2.31 billion if construction began today.

According to the index, all types of power plants are feeling the pinch.Components and construction materials for nuclear power plants scored the biggest run-up in costs, up 173% -- nearly tripled -- since 2000. Most of that increase has taken place since 2005. Costs for turbines used to generate wind power more than doubled, at 108%, and natural gas-fueled and coal-fired plants saw their capital costs nearly double, up 92% and 78%, respectively.

If anything, the index likely minimizes the rising cost of building power plants, because it doesn't factor in financing costs, and it doesn't include fuel costs. But as prices for coal, natural gas and uranium have risen, they have put added pressure on the operating costs of many companies, and those increases are pushing up electricity prices, too.

The upshot, Ms. Scott said, is that prudent utility regulators should make sure they are basing future decisions on data that are updated frequently, because even calculations less than a year old can be dangerously out of date.

One practical consequence of the inflationary pressures is that they make it harder for plant developers, such as utilities, to lock in prices as part of big projects. The longer the time period involved in construction, the bigger the risks inherent in any fixed-price contracts. Instead of paying for "time and materials," many firms are seeking contracts in which prices are tied to various indexes.

In some states, utilities are rolling out big programs to install millions of "smart" electric meters in the belief they will help cut electricity consumption and reduce the need for new power plants. Oncor, a big utility in Texas, last week said it plans to install three million advanced meters on homes and small businesses, giving consumers a tool to help get a handle on electricity use.

The CERA report underscores the tough choices facing utilities and regulators. Both are interested in finding the technology that will be most affordable. That is especially difficult, since big power plants often remain in service 40 to 60 years.

One commodity whose cost has risen markedly is steel, a important material for building both power-plant structures and power-generating equipment. The cost of iron ore, needed to make steel, rose about 10% in 2007 but has surged 65% in recent months. Shortages of coking coal, also needed to make steel, have been another problem in Australia, a big export country. CERA said steel costs could rise 40% to 60% this year.

A weak dollar also is a factor, since roughly 30% of equipment needed by the U.S. power industry comes from outside the U.S.

The analysis is of interest because it is difficult to get solid cost data until after plants have been built. Even then, data aren't always available.

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