(June 2008) As fossil fuel prices continue increasing and alternative energy gathers momentum, the energy and utility industries can expect to see continued interest from private-equity...
Increasing prices for materials, equipment and services are driving utility infrastructure costs into uncharted territory.
data showed a positive and statistically significant relationship between a plant’s real construction cost and its online date, meaning that, everything else equal, the later a plant was brought online, the higher its real installation cost. 6 The average installation cost increased gradually from 2000 to 2003, followed by a fairly significant increase in 2004 and a very significant escalation—more than $300/kW—in 2006. This provides vivid evidence of the recent sharp increase in plant-construction costs.
Another major class of generation development during this decade has been wind generation, the costs of which also have increased in recent years. The Northwest Power and Conservation Council (NPCC) issued its most recent review of the cost of wind power in July 2006. 7 The Council found the cost of new wind projects rose substantially in real terms in the last two years, and was much higher than assumed in its most recent resource plan. Specifically, the Council found the construction cost of wind projects, in real dollars, has increased from about $1,150/kW to $1,300-$1,700/kW in the past few years, with an unweighted average capital cost of wind projects in 2006 at $1,485/kW. The average cost of wind power plants now being developed is still higher, with construction costs estimated from $1,700/kW to $2,000/kW. 8
Broadly speaking, four factors are driving rising costs for utility infrastructure: 1) material costs, including such commodities as steel and cement, as well as manufactured components; 2) limited shop and fabrication capacity for manufacturing major components; 3) costs for construction field labor, both unskilled and craft labor; and 4) the market for large construction-project management and EPC services.
Utility construction projects involve large quantities of steel, aluminum and copper (and components manufactured from these metals) as well as cement for foundations, footings and structures. All these commodities have experienced substantial recent price increases, due to increased domestic and global demands as well as increased energy costs in mineral extraction, processing and transportation (see Figure 2, “Raw Materials Costs”) . In addition, since many of these materials are traded globally, the recent performance of the U.S. dollar affects domestic costs.
In particular, various sources point to the rapid growth of steel production and demand in China as a primary cause of the increases in both steel prices and the prices of steelmaking inputs. 9 Today’s steel prices remain at historically elevated levels and likely will remain high for the near future.
Other metals important for utility infrastructure display similar price patterns: declining real prices over the first five years or so of the previous 10 years, followed by sharp increases in the last few years. These price increases also were evident in other metals—such as nickel and tungsten—that contribute to steel alloys used broadly in electrical infrastructure. Prices for wire products have spiked compared to the inflation rate, highlighting the impact of underlying metal price increases (see Figure 3, “Electric Wire and Cable Price Indices”).
In addition to metals, large infrastructure projects require huge amounts of cement as well as basic stone materials. And the price of these commodities has