Increasing prices for materials, equipment and services are driving utility infrastructure costs into uncharted territory.
By now, the evidence is overwhelming. Utility-industry construction costs have risen and will remain elevated for some time.
Some of the factors underlying these trends are straightforward. For example, costs for steel, copper and concrete have risen sharply due to high global demand, as well as production and transportation costs (in part owing to high fuel prices), and a weakening U.S. dollar. Other drivers are less transparent. Labor costs generally have tracked inflation rates, but shortages in skilled workers have driven costs higher for utility equipment and construction services.
Moreover, constraints in component-manufacturing capacity as well as engineering, procurement and construction (EPC) services exacerbate cost pressures. In January 2007, for example, OG&E executives reported that the cost estimate for EPC services for building the company’s proposed Red Rock coal-fired power plant increased by more than 50 percent in just nine months, from $223 per kilowatt to $340/kW.1
Although customers will not see the full rate impact associated with construction cost increases until infrastructure projects are completed, these increases now are affecting industry investment plans and presenting new challenges to regulators.