Power Plant Construction Costs Rise for First Time Since Q1 2008, But Gain is Limited

Costs for North America and Europe rose one percent and three percent, respectively during Q3 2009 – Q1 2010 period

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Thursday, July 15, 2010 7:00 am EDT

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CAMBRIDGE, Mass.
"Europe’s situation is compounded by the fact that it is pulling out of the recession more slowly than other regions"

CAMBRIDGE, Mass.--(BUSINESS WIRE)--The latest IHS CERA Power Capital Costs Indexes (PCCI) for North America and Europe show that power sector construction costs rose slightly during the Q3 2009 – Q1 2010 period for the first time since 2008. Costs continue to show resilience to downward price movement despite continued weakness in new plant construction orders.

A proprietary measure of project cost inflation similar in concept to the Consumer Price Index (CPI), the IHS CERA PCCI tracks the costs of building coal, gas, wind and nuclear power plants in both regions and is indexed to the year 2000. The PCCI for North America now registers 215 (up one percent from 213 at the end of Q3 2009), indicating that a portfolio of power plants that cost $100 billion in 2000 would, on average, cost $215 billion today. The PCCI index for the European portfolio, calculated in euros, is at 182, up three percent over the same six-month period.

The increases to the PCCI were driven primarily by rising commodity prices fueled by global supply and demand factors and Asia’s high growth coming out of the recession. Steel costs for North America and Europe rose 2 percent and 6 percent, respectively. Electrical bulk costs, driven by rising copper prices, posted the largest increases in both North America (15 percent) and Europe (22 percent).

But the slight rise in the index scores does not necessarily represent the beginnings of a shift in the prevailing cost environment, said IHS CERA Senior Director of Cost and Technology, Candida Scott.

“Despite the slight rise in costs, the results of the PCCI reflect more continuity than change,” Ms. Scott said. “Costs have remained relatively the same for the past year, displaying resiliency to downward pressures such as reduced electricity consumption and reduced construction activity.”

Europe’s larger increase in costs was augmented by the weakening of the euro against the U.S. dollar, which led to the increase in the costs of equipment sourced from global markets.

Several trends were common for both regions, however. In addition to the volatility of commodities, the market for major equipment remains on a downward trend as a result of weak demand and greater competition among manufacturers. Engineering and project management costs were also relatively flat for both regions. Having cut margins as much as they can, firms are managing the downturn through more flexible contract terms.

“Strong competition among manufacturers is keeping major equipment and plant cost increases in check despite rising commodity prices,” said IHS CERA Director, Roger Kranenburg. “International manufacturers are increasingly targeting North American markets such as gas turbines and onshore wind turbines.”

Construction labor costs for both regions rose slightly (one percent) but are on diverging paths, the indexes find. Labor costs for North America are trending upward due to rising wages and stabilized profit margins, while downward pressure on European wages continues as a result of low production levels in construction that have fallen to their lowest level since 1997.

“Europe’s situation is compounded by the fact that it is pulling out of the recession more slowly than other regions,” said IHS CERA Director, Deborah Mann. “Europe could be facing a situation where costs are being driven upward by global markets while demand for power projects within Europe itself remains suppressed.”

IHS CERA expects power capital costs to remain relatively flat for the short term with additional decreases in major equipment costs as the market awaits recovery.

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 Candida Scott at cscott@cera.com.

About IHS CERA (www.ihscera.com)

IHS CERA is a leading advisor to energy companies, consumers, financial institutions, technology providers and governments. IHS CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. IHS CERA is based in Cambridge, Mass., and has offices in Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City, Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo and Washington, DC.

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