The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
The Big Build
Utility infrastructure projects face high costs, labor shortages and global competition for resources.
rest using circulating fluidized bed technology. The fossil division also worked on 14 AQC projects—one of them in Hong Kong—and a geothermal plant construction project in Indonesia. The Nuclear division in 2007 worked on the four plants being built in China, and it opened a new office in Shanghai in support of these projects and in anticipation of future awards using the AP1000 design. Finally, Shaw’s maintenance division worked with a number of nuclear utilities on outages and power uprate projects.
Siemens: Scaling Up
Fortnightly: What market trends does Siemens see evolving in construction of utility infrastructure?
Karwoski: Most of our suppliers are based outside of the United States today. We get a lot of our equipment now from China and Germany. We are finding a lot of our suppliers including Siemens itself are fully loaded. The lead times for a lot of equipment required for building power plants are really extending. We are seeing, for example, a combined-cycle project that used to take 22 to 24 months as the industry standard, now moving out to 30 months to build. A lot of that is driven by the equipment, for example transformers, HRSG, boiler components, pumps and gas compressors. All the suppliers are fully loaded worldwide, and that is driving longer construction lead times on all projects in the United States.
Fortnightly: What role does Siemens have in keeping utility infrastructure construction costs under control?
Karwoski: That is probably the most difficult aspect. In the United States we have two main impacts. The first impact is the currency, so for U.S customers that are buying, the weak dollar has made plants much more expensive in the United States than they had been because much of that is sourced outside of the United States.
We look at it in terms of life-cycle cost, not necessarily first cost. So when Siemens constructs a gas-turbine-based plant, we’re putting the largest technology we can put in on a dollars-per-kilowatt basis. On an efficiency basis we are improving the performance of the project with our technology. It is very difficult to keep the costs of the suppliers under control. In fact, the cost of Siemens equipment is much easier to control than that of some of our sub-suppliers. We will increase the size of the unit, the efficiency of the unit and the functionality to give our customers a better solution for their specific needs.
Fortnightly: Increases in costs for skilled and craft labor are a problem and some expect a lack of skilled workers going forward. How is Siemens dealing with these issues?
Karwoski: Typically if we go to a site, we have to pay retention bonuses to retain craft labor and skilled craft labor. Safety also is a primary component. We look at contractor relationships—we have relationships with certain contractors we work with all the time. We work primarily with three or four general contractors that provide us with a key supervisory force. It is a difficult issue in certain U.S. regions. There have been jobs we have paid essentially double the national labor rate