POWER PLANT TYPE VS. COST
One of the core factors affecting construction costs for power generation facilities is the type of proposed facility. Construction costs can vary widely depending on whether they are coal-fired power plants or plants powered by natural gas, solar, wind, or nuclear generator facilities. For investors in power generation facilities, construction costs between these types of generation facilities is a critical consideration when assessing whether an investment will be profitable. Investors must also take into account other factors, like ongoing maintenance costs and future demand in order to determine a favorable rate of return. But central to any calculation is the capital cost required to bring a facility online. As such, a brief discussion of actual construction costs for different types of power plants is a helpful starting point before exploring other dynamics that influence power plant construction costs.
When analyzing power plant construction costs it is important to keep in mind that realized construction costs can be influenced by a number of dynamics. For example, access to resources that drive power production can have a large impact on construction costs. Resources like solar, wind, and geothermal are distributed unevenly, and the cost of accessing and developing these resources will increase over time. Early entrants into the market will capture the most cost-effective access to resources, while newer projects may have to pay significantly more for access to equivalent resources. The regulatory environment of the power plant location can have a large impact on the lead time of the construction project. For projects that have a heavy initial investment in construction this can lead to increased interest accrual and overall construction costs. For more information about the myriad of factors that can influence construction costs for power plants, refer to the Capital Cost Estimates for Utility Scale Electricity Generating Plants released by the U.S. Energy Information Administration (EIA) in 2016.
Power plant construction costs are presented as the cost in dollars per kilowatt. The information presented in this section is provided by the EIA. Specifically, we will be using power plant construction costs for power generation facilities constructed in 2015, found here. This information is the most current provided, but EIA is expected to release power plant construction costs for 2016 in July 2018. For those interested in power plant construction costs, publications by the EIA are one of the most valuable sources of information available. The data provided by the EIA is useful to illustrate the complex nature of power plant construction costs, and highlights the multitude of variables that can not only affect power plant construction costs but also ongoing profitability.
LABOR AND MATERIAL COSTS
Labor and materials are two of the core drivers of power plant construction costs, and both are leading to rising construction costs each year across all industries. Keeping abreast of fluctuations for both labor and materials is important when assessing total construction costs for power plants. Power plant construction is generally an extended undertaking. Projects can take between 1 and 6 years for completion at a minimum, with some extending considerably further. The EIA rightly points out that differences between the projected and real cost of materials and construction over the course of the project are important to consider and can have a substantial impact on construction costs.
Construction costs in general are rising, but two of the primary drivers of this is material and labor burden. Material costs have risen dramatically in recent months, and may continue to rise should current policy stances be maintained. In particular, tariffs on foreign imports of key metals, including steel, aluminum, and iron, as well as lumber from Canada, are producing dramatic fluctuations in material costs. Real material costs are currently up roughly 10% over July 2017. This trend doesn’t appear to be diminishing for the foreseeable future. Steel is especially important for power plant constructions, so continued tariffs on imported steel could result in substantial cost increased for power plant construction of all types.
Increased labor costs in the construction industry are also contributing to rising construction costs. Increased labor costs are being driven by a shortage of skilled labor stemming from the low turnout of millennials in construction trades and a dramatic shrinking of the construction labor force during and post-recession. Although many construction firms are integrating career pathway programs to entice more millennials into trade industries, it will take time to fully see the effect of these efforts. This labor shortage is seen most vividly in urban areas with stiff competition for skilled labor exists. For power plant construction projects near urban centers, access to skilled labor may be limited and may come at a premium.
Post time: Jul-22-2022
