Increasing prices for materials, equipment and services are driving utility infrastructure costs into uncharted territory.
the data showing an increased worldwide demand for infrastructure projects in general, including utility generation, transmission, and distribution projects.
Growth in construction project backlogs likely will dampen the competitiveness of EPC bids for future projects, at least until the EPC industry is able to expand capacity to manage and execute greater volumes of projects. Although difficult to quantify, this lack of spare capacity in the EPC market undoubtedly will inflate the price of new bids for EPC services and contracts.
These factors, as well as the other inflationary pressures beyond the utility industry’s control, have contributed to an across-the-board increase in the costs of investing in utility infrastructure—and those higher costs show no immediate signs of abating.
Paying the Price
As a result of the undeniable need for additional infrastructure, utilities and non-utility developers will continue investing in baseload generation, environmental controls, transmission projects and distribution systems. However, rising construction costs will put additional upward pressure on retail rates over time, and may alter the pace and composition of investments going forward. For example, the increasing fixed costs of base-load coal and nuclear facilities have reduced the cost savings the industry anticipated from expanding the solid-fuel fleet.
The overall impact on the industry and on customers will be borne out in various ways, depending on how utilities, markets and regulators respond to these cost increases. In the long run, customers ultimately will pay for increasing construction costs. Most directly, these costs will result in higher rates to recoup asset investments, and less directly, higher energy-market prices to attract new generating and transmission capacity in organized power markets. And customers will pay indirectly, when rising construction costs inevitably defer investments and delay expected benefits, such as enhanced reliability and lower, more stable long-term electricity prices.
1. Testimony of Jesse B. Langston before the of the Oklahoma Corporation Commission, Cause No. PUD 200700012, Jan. 17, 2007, p. 27 and Exhibit JBL-9.
2. “New Nuclear Generation in the United States: Keeping Options Open vs. Addressing an Inevitable Necessity,” Moody’s Investors Service, Oct. 10, 2007.
3. Chupka, Marc W. and Basheda, Gregory, Rising Utility Construction Costs: Sources and Impacts, Edison Foundation, September 2007.
4. The GDP deflator measures the cost of goods and services purchased by households, industry and government, and is a broader price index than the Consumer Price Index (CPI) or Producer Price Index (PPI), which track the costs of goods and services purchased by households and industry, respectively.
5. Ibid. Chupka.
6. To be precise, the authors used a “dummy” variable to represent each year in the analysis. The year-specific dummy variables were statistically significant and uniformly positive; i.e., they had an upward impact on installation cost.
7. “ Biennial Review of the Cost of Windpower ” July 13, 2006.
8. Annual Report on U.S. Wind Power Installation, Cost, and Performance Trends: 2006, U.S. DOE, May 2007, pp. 15-16.
9. Steel: Price and Policy Issues, CRS Report to Congress, Congressional Research Service, Aug. 31, 2006.
10. These figures represent a simple average of six regional indices. However, local and regional