Power Plant Construction Costs: Cost Pressures Returning

Power sector’s years-long stagnation ending as underlying trends begin to strengthen

Wednesday, July 6, 2011 9:30 am EDT

Dateline:

CAMBRIDGE, Mass.
"Steel costs are a prime example of the volatility that persists in the commodities markets"

The costs of building new power plants are reversing course and trending upward after years of steady decline, according to the latest findings of the IHS CERA Power Capital Costs Indexes (PCCI) for North America and Europe. Rising steel and copper costs helped drive the rebound.

A proprietary measure of project cost inflation similar in concept to the Consumer Price Index (CPI), the IHS CERA PCCIs track construction costs for building coal, gas, solar, wind and nuclear power plants in both regions and are indexed to the year 2000. The PCCI for North America rose 2 percent to an index score of 219, indicating that a portfolio of power plants that cost $100 billion in 2000 would, on average, cost $219 billion today.


North American costs had been on a sustained and prolonged decline since Q1 2008 before bottoming out via a small and short-lived rise during the Q3 2009-Q1 2010 period. They had remained flat since.

The latest increase in costs signals the first significant upward momentum since the long decline in costs began, said IHS Senior Director of Cost and Technology, Candida Scott.

“The latest rise in costs, while measured, represents a substantial shift in momentum,” Scott said. “We have now moved past a bottoming-out and costs have begun their slow march upward.”

The recovery of power plant capital costs was not impacted by major shocks in the form of Middle East unrest and the Japanese nuclear disaster. North American costs for all fuel types increased except for wind, which continues to face competitive pressures. The cost of nuclear power plants, which are experiencing a global pause due to the nuclear crisis in Japan, rose 2 percent.

The PCCI index for the European portfolio, calculated in euros, actually fell 2 percent over the same six-month period. However, the decline was due largely to exchange rate fluctuations, especially the strengthening of the euro against the U.S. dollar. The European index score now stands at 190.

“Exchange rates aside, the underlying global trends for both North America and Europe are actually very similar and point to a period of rising costs,” Scott added.

North American costs rose during the Q3 2010 – Q1 2011 period as increased industrial project activity outside of the power sector drove up equipment, material and labor costs—especially items linked to metal and oil commodity costs, such as construction steel and transportation. Steel costs increased 12 percent due to higher raw material costs while electrical bulk costs were up 9 percent. Major equipment costs, which bottomed out but are still lagging behind the broader economic recovery, was the only one of the index’s benchmark markets to register a decrease (1 percent drop) over the six month period.]

The underlying cost trends were broadly similar for the Europe index, though the movements of markets were muted by the stronger euro. Construction labor costs, previously one area where the two continents had begun to diverge, appear to be moving along the same track once more. Construction labor costs for both North America and Europe posted modest gains driven by increased living costs. In Europe, where labor rates had been slowing, labor costs in local currency (LCU) terms rose in most countries.

Volatility in the commodities markets—and their impact on steel, electrical bulks and construction and civils—will be one of the main characteristic of the cost recovery moving forward, said Roger Kranenburg, director, IHS CERA Capital Costs Analysis Forum – North American Power.


“Steel costs are a prime example of the volatility that persists in the commodities markets,” Kranenburg said. “Supply uncertainties and disruptions combined with demand uncertainties linked to the strength of the economic recovery are going to persist.”

IHS CERA expects power capital cost in aggregate to continue their rise in the near term, though a downward correction in metal commodity costs will counteract increases in other markets to some degree.

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About the IHS CERA Power Capital Costs Index (PCCI)

The IHS CERA PCCI tracks the costs of equipment, facilities, materials and personnel (both skilled and unskilled) used in the construction of a geographically diversified portfolio of more than 30 power generation construction projects throughout North America. The PCCI for Europe is based on a separate diversified portfolio of European projects.  The PCCI is analogous to the consumer price index (CPI) in that it provides a clear, transparent benchmark tool for tracking and forecasting a complex and dynamic environment. The PCCI for each of the two portfolios can be tracked on the IHS Index Web Site at www.ihsindexes.com. The PCCI is a work product of IHS CERA’s Capital Costs Analysis Forum for Power (CCAF-P). For information on the Capital Costs Analysis Forum for Power, contact Ken Downey at ken.downey@ihs.com

About IHS (www.ihs.com)

IHS (NYSE: IHS) is the leading source of information and insight in critical areas that shape today’s business landscape, including energy and power; design and supply chain; defense, risk and security; environmental, health and safety (EHS) and sustainability; country and industry forecasting; and commodities, pricing and cost. Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 5,100 people in more than 30 countries around the world.


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Contact:

Energy; Natural Resources
Jeff Marn, +1 202 463 8213
Energy Strategy, Renewable Energy
jeff.marn@ihsmarkit.com