It is time to adapt to new rules of the game, and change procurement tactics. Read these five effective strategies for managing escalating input costs.
Power-Plant Development: Raising the Stakes
Duke Energy’s Jim Turner and other utility executives weigh the odds on billion-dollar bets.
It could be described as the world’s highest stakes betting game—power generation development. Not even the recent James Bond movie, Casino Royale , where audiences were riveted by a climactic $100 million poker game, can touch the sums (and risks) that utility executives must face.
According to the Edison Electric Institute (EEI), investor-owned utilities spent $46.5 billion in 2005 and more than $60 billion in 2006 to develop new power infrastructure. U.S. utilities added 5,507 MW and announced 33,998 MW of new capacity additions in 2006. In fact, last year alone, environmental capital expenditures doubled from $3.2 billion to $6.4 billion, said EEI.
Looking at the forecasts for 30 years, the heavy investment required for new generation technologies clearly is a global phenomenon. According to the World Energy Investment Outlook 2006 , power-sector companies will spend about $11 trillion dollars by 2030. “That’s for the overall power sector that includes power generation, transmission, and distribution assets,” says Andy Webster, a consultant at Accenture, adding that power generation alone will account for $5 trillion.
Without question, those amounts would impress even the most exclusive casino owner in Monte Carlo, especially as the odds of winning the development game are quickly changing.
Global resource competition is making power-plant development more expensive, and may even limit the number that any one utility in any one country can develop.
Duke Energy recently disclosed a cost of roughly $1.9 billion (including Accumulated Funds Used During Construction [AFUDC]) for its proposed 800-MW Cliffside coal unit in North Carolina, which translates to a price tag of $2,375/kW. In a research report, Wachovia analyst Samuel Brothwell said the price reinforces the trend of escalating costs for new-build construction materials, equipment, and labor contracts. The $1.93 billion for the one unit was almost the original cost estimate for the two plants Duke had proposed to build. Also, in late 2006, Duke Energy had to revise its price estimates for the nuclear power plant it may build in Cherokee County, S.C.
“We have said that the cost of constructing two AP1000 Westinghouse units could be between $4 billion and $6 billion,” said Jim Turner, president and COO, U.S. Franchised Electric & Gas, at Duke Energy.
Turner says the utility is taking a proactive approach in trying to convey the higher costs to regulators and the public. “We are going to let everybody know, ‘Look it’s more expensive today than it was not long ago. Prices have gone up everywhere. It is a hot market for both base-load coal and for base-load nuclear and that’s the world in which we find ourselves,” he says.
“We’ll make it clear in the beginning that the costs estimates are higher than we expected, and then we are going to work like crazy to bring the plants in at the estimates that we put out there,” Turner explains.
Indeed, some nuclear experts believe that world-resource competition may put limitations on the