Power Engineering - Power plant construction costs fall, index shows

23 June 2009 -- The latest IHS CERA Power Capital Costs Index (PCCI) shows the costs of constructing new power plants fell an additional 3 percent over the past six months, signaling a broader downward trend that has now spread beyond nuclear to all classes of power plants.

The PCCI tracks the costs of building coal, gas, wind and nuclear power plants and is indexed to the year 2000. It now registers 217 index points (down from 224 at the end of Q3 2008), indicating that a power plant that cost $1 billion in 2000 would, on average, cost $2.17 billion today.

The decline over the past six months was driven primarily by a decrease in costs of construction steel, wire, cables, rebar and asphalt stemming from sharply lower prices for steel, copper and petroleum.

Though the overall PCCI has been trending downward since first quarter 2008, the decline had previously been driven by the fall in nuclear power plant construction costs. That factor masked continued cost escalation of all others. This marks the first time in nearly a decade that the costs of nonnuclear plants (coal, gas and wind) have decreased.

"The current 3 percent drop may appear modest compared to the sizable global decline in new construction orders but in this case it represents a true turning of the tide," said Candida Scott, IHS CERA Senior Director of Cost and Technology. "We can expect the downward pressure to continue to build as falling costs work their way through the supply chain."

Total construction costs have proven more resilient to the recession than materials prices at this point, the firm said. Substantial order backlogs have allowed equipment manufacturers to maintain their price position. But as the global order pipeline slows they are likely to pass along lower input costs more aggressively.

Wind has shown the sharpest decrease at 11 percent due to a combined drop in wind turbine and tower costs and a short-term slowdown in orders. Wind was also the most impacted by the current economic and financial crisis, which led to a drying up of tax equity and debt investors. Lower costs for turbines, towers and construction and civils could lead to a continued decrease in costs in the near term.

Costs for combined-cycle and simple-cycle gas plants declined by 6 percent over the past six months as part of the larger trend in declining commodity and bulk materials prices. Reduced demand for power due to the recession has led to a lower number of gas generation projects in the pipeline for North America. That means costs could fall further in the near term as demand for gas turbines declines while companies wait for power demand to recover.

Coal power plant costs fell 6 percent due to declines in both labor and ancillary equipment costs. Costs for coal plants could decline further in the near term as continued uncertainty over environmental policy and higher financing costs cause the slackening of demand for new plants to persist.

The decline in nuclear plant costs slowed over the past six months, falling by 1 percent, due to lower materials costs and additional manufacturing capability for key components. Despite an active pipeline, falling steel prices are likely to push costs down further in the near term.

The PCCI suggests additional declines in costs are likely, particularly as equipment costs further catch up with the fall in materials prices.

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