(Special from Power Engineering magazine’s Coal-Gen e-newsletter, February 15)
Power providers from across the country report an uptick in cost estimates for their proposed coal-fired plants due to what they say are higher equipment, labor and raw material prices. Growing international competition for power plant construction parts, equipment and labor has added to price pressures and are causing some utilities to rethink their coal building plans.
“When equipment and construction cost estimates grow by $200 million to $400 million in 18 months, it’s necessary to proceed with caution,” Westar Energy CEO James Haines said in a statement in late December announcing the company’s decision to delay site selection for its proposed coal-fired plant.
“Fundamentally, costs are escalating because so many new plants being built in the United States and worldwide are driving up demand,” said Westar spokesperson Gina Penzig.
Given the volatile nature of construction and fuel costs and the long lead-time needed to permit, finance and build a baseload plant, Penzig said “the chance of a decision looking right, wrong, then right again during that time is high.”
American Electric Power (AEP), Duke Energy, Peabody Energy and others have cited similar problems in their pursuit of building new coal-fired generation. Although coal will continue to be a significant part of the U.S. generation mix, unexpected costs and increased global demand may affect aggressive schedules for adding new coal-fired units.
Escalating Bids
With a spike in interest in building coal power plants, everything should be coming up roses for original equipment manufacturers (OEMs). But experts note the difficult situation OEMs have found themselves in when utilities want to sign memorandums of understanding (MOUs) even as important project details remain unsettled.
Equipment suppliers scaled back manufacturing capacity and/or went out of business during the past 20-year drought of coal plant building, said Pete Hessler, author of Power Plant Construction Management: A Survival Guide, which, like Power Engineering, is published by PennWell. Those who survived are not yet ready to invest in additional capacity “just on news announcements of more plants to be built,” he said.
Although utility boards may be convinced of coal’s many positive generation points, regulated and unregulated power producers are beholden to a plethora of outside factors. Environmental groups, utility commissions, financiers and politicians can delay or even kill a utility’s operational plans, as in the case of the Salt River Project’s February decision to abandon efforts to restart the Mohave generating station (see news brief in this issue).
Hessler pointed to TXU Corp.’s recent problems in getting air permits for its planned 11 new coal-fired units. What seemed like a slam dunk for a permit from the Texas Commission on Environmental Quality has drawn media coverage and created public relations issues for the utility. For most of these new plants, TXU has made public its decision to work with Bechtel and Babcock & Wilcox. Although TXU has released the contractors to do some preliminary work, Hessler said that nothing is firm enough for them to greatly expand their manufacturing capacity.
If TXU’s scenario is multiplied across the industry, manufacturers may not be willing to increase capacity without assurances of additional business, Hessler said. In other words, “if the power generation owners really want to build all of these plants, manufacturing capacity will have to increase, and this, along with the additional squeeze of raw materials, means an increase in costs to the manufacturer passed on to the buyer,” he said.
Strong demand in an environment of low supply creates a formula for high prices. For example, in mid-January Duke Energy doubled its cost estimates to more than $3 billion for two 800 MW plants it wants to build in North Carolina.
“The project is under significant jeopardy of future substantial cost increases,” William McCollum, Duke Energy’s chief regulated generation officer, told the Associated Press. He said that if the utility cannot lock in bids on equipment and labor before their offers expire, costs could go up even more. “(Contractors) basically have other businesses they can contract for,” he said.
Construction costs
Political, social and market factors aside, the price of a power plant comes down to raw materials and labor.
“I can’t remember commodity prices rising any faster,” said Greg Scheu, ABB president of automation products, North America, in late January. Supplies are tight and costs are rising for materials such as steel, copper, aluminum and oil.
As the buyer of 14 percent of the world’s supply of electrical steel, ABB is feeling the pinch, said Bob Fesmire, manager of trade media relations. “Copper prices are up 277 percent, aluminum 101 percent, carbon steel 98 percent and the crude oil index 97 percent,” he said (see figure).
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Appalachian Power, a unit of AEP, blamed rising prices as the reason it had to adjust a detailed cost estimate for West Virginia regulators regarding its proposed 600 MW integrated gasification combined cycle (IGCC) plant.
“What we’ve found out is, part of the higher cost is from the construction market-concrete, steel, labor-the regular things you have in construction,” said Jeri Matheney, Appalachian Power spokeswoman to the Charleston Daily Mail in early January.
Concrete and structural steel prices are affecting construction projects, but so is the curent shortage of skilled labor. Hessler believes the labor situation has no quick fix and that plants will pay more for labor through higher rates, more overtime and travel pay to attract the relatively few available craftspeople to the plant site.
And those craftspeople, scarce raw materials and equipment manufacturers are not only in high demand in North America; they’re in demand around the world.
International Competition
“Everyone has to watch what China is doing,” said Enrique Santacana, President of ABB’s North American power technologies division. This heightened awareness of Chinese growth is being noted across the North American power industry.
According to recent Chinese government statistics, the fast-growing energy and economic giant added 102 GW last year, double California’s total capacity. International Energy Agency data expects coal-fired generation in China to more than double by 2020. It anticipates continued strong growth in other energy-hungry countries like India. The agency said electricity generated from fossil fuels in Asia is expected to grow faster than anywhere else in the world, with coal accounting for 50 percent of total primary energy consumption.
Bradley Jones, TXU vice president of generation development, told the keynote audience at POWER-GEN International in late November that the Texas utility would keep costs at $1,100/kW for its proposed coal plants by sourcing parts and equipment from “low-cost countries.” Many other utilities are looking to find similar ways to cut costs on construction goods and power plant equipment. But Hessler said that those same low-cost countries need power supply increases of their own to continue growing.
“The interesting unknown is, since a significant quantity of the equipment and materials for the U.S. units has been planned from China in particular, how will the Chinese react to a dual market opportunity-domestic and foreign?” he asked.
As competing global interests escalate in supplier countries, the savings that utilities counted on when initiating plans to build may disappear.
“The whole issue is essentially an upward spiral of costs and will ultimately end up in delayed and canceled plants,” Hessler said. “Those that do get built will cost more than originally planned.”
-Amethyst Cavallaro