Adopting an interoperable framework for the smart grid isn’t just a question of technology standardization. It’s also about navigating the legal, regulatory, and business factors that affect...
Banking on the Big Build
The need for many hundreds of billions of dollars in capital expenditures creates huge opportunities and challenges, especially in a more challenging credit environment.
The utility industry needs to prepare for a period of much higher capital expenditures. This results from the confluence of several factors:
• Shrinking generation reserve margins, as the glut of surplus capacity from earlier in the decade has been worked through much more rapidly than expected;
• Spending on compliance with NOx, SOx, and mercury requirements;
• Pressures to invest in lower-carbon—and more expensive—generation technology and associated infrastructure, including transmission;
• The need to replace aging transmission and distribution (T&D) infrastructure, much of which was put in place 30-40 years ago and is nearing the end of its design life;
• Continued robust rates of population growth and economic growth in many parts of the United States, resulting in the need for system expansion; and
• Technology spending on areas such as customer information systems and automated meter reading.
The numbers are huge. Cambridge Energy Research Associates estimates that $900 billion of direct infrastructure investment will be required by electric utilities over the next 15 years. That compares with $750 billion of plant currently in place. And experience, both in the utility industry and more broadly, suggests that it is rare for major construction projects to be completed on budget (or on time).
The high capital costs of nuclear generation are well-known, although exactly how high is not entirely clear. General Electric recently estimated the cost of the new reactor that it is marketing in combination with Hitachi at anywhere from $2,000-$3,000/kW. FPL has put the cost of potential new nuclear units at its Turkey Point facility at $4,000/kW.
For those deterred by the projected costs of nuclear, there is not much relief with alternative low-carbon technologies. Tampa Electric filed documents with the Florida Public Service Commission in July 2007 regarding its proposed new 630-MW Polk 6 integrated gasification combined-cycle (IGCC) project, which is expected to enter service by 2013. The filing indicated a total cost of $2 billion, or $3,175/kW. $1.6 billion ($2,540/kW) was for engineering, procurement and construction, and the balance of $400 million ($635/kW) was for other costs such as transmission infrastructure and environmental permitting.
Nor is the news much better with renewables. Following a long period of decline for wind-project costs, prices have started to increase again. According to the U.S. Department of Energy, average installed project costs for wind projects coming online in 2006 were approximately $1,480/kW, which represented an increase of almost 20 percent over projects coming online in 2005. Further increases are in the pipeline. For projects proposed in 2006 but not yet built, the Department of Energy estimates that installed costs will be $1,680/kW. Much of this has been driven by higher prices for the turbines, which have increased by approximately $400/kW over the last five years. Costs for solar and other renewable technologies are even higher than for