Electricity Plant Costs Uncertainties |
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Electricity Plant Cost Uncertainties Construction costs for new power plants have increased at an extraordinary rate over the past several years. One study, published in mid-2008, reported that construction costs had more than doubled since 2000, with most of the increase occurring since 2005 [73]. Construction costs have increased for plants of all types, including coal, nuclear, natural gas, and wind. The cost increases can be attributed to several factors, including high worldwide demand for generating equipment, rising labor costs, and, most importantly, sharp increases in the costs of materials (commodities) used for construction, such as cement, iron, steel, and copper. Commodity prices continued to rise through most of 2008, but as oil prices dropped precipitously in the last quarter of the year, commodity prices began to decline. The most recent power plant capital cost index published by Cambridge Energy Research Associates (CERA) shows a slight decline in the index over the past 6 months, and CERA analysts expect further declines [74]. The current financial situation in the United States will also affect the costs of future power plant construction. Financing large projects will be more difficult, and as the slowing economy leads to lower demand for electricity, the need for new capacity may be limited. The resultant easing of demand for construction materials and equipment could lead to lower costs for materials and equipment when new investment does take place in the future. Fluctuating commodity prices, combined with the uncertain financial environment, increase the challenge of projecting future capital costs. Because some plant types—coal, nuclear, and most renewables—are much more capital-intensive than others (such as natural gas), the mix of future capacity builds and fuels used can differ, depending on the future path of construction costs. If construction costs increase proportionately for all plant types, natural-gas-fired capacity will become more economical than more capital-intensive technologies. Over the longer term, higher construction costs are likely to lead to higher energy prices and lower energy consumption. The AEO2009 version of NEMS includes updated assumptions about the costs of new power plant construction. It also assumes that power plant costs will be influenced by the real producer price index for metals and metal products, leading to a decline in base construction costs in the later years of the projections. As sensitivities to the AEO2009 reference case, several alternative cases assuming different trends in capital costs for power plant construction were used to examine the implications of different cost paths for new power plant construction.
Power Plant Capital Cost Cases For the AEO2009 reference case, initial capital costs for new generating plants were updated on the basis of costs reported in late 2007 and early 2008. The reference case cost assumptions reflect an increase of roughly 30 percent relative to the cost assumptions used in AEO2008, and they are roughly 50 percent higher than those used in earlier AEOs. Because there is a strong correlation between rising power plant construction costs and rising commodity prices, construction costs in AEO2009 are tied to a producer price index for metals and metal products. The nominal index is converted to a real annual cost factor, using 2009 as the base year. The resulting reference case cost factor remains nearly flat for the next few years, then declines by a total of roughly 15 percent to the end of the projection in 2030. As a result, future capital costs are lower even before technology learning adjustments are applied. The same cost factor is applied to all technology types. Although the correlation between construction costs and the producer price index for metals has been high in recent years, it is possible that costs could be affected by other factors in the future. There is also uncertainty in the metals index forecast, as with any projection. Therefore, the sensitivity cases do not use the metals index to adjust plant costs but instead use exogenous assumptions about future cost adjustment factors to provide a range of cost assumptions. In the frozen plant capital costs case, base overnight construction costs for all new electricity generating technologies are assumed to remain constant at 2013 levels (which is when the cost factor peaks in the reference case). Because cost decreases still can occur as a result of technology learning, costs do decline slightly from 2013 to 2030 in the frozen costs case. In 2030, costs for all technologies are roughly 20 percent higher than in the reference case. In the high plant capital costs case, base overnight construction costs for all new generating plants are assumed to continue increasing throughout the projection, by assuming that the cost factor increases by 25 percentage points from 2013 to 2030. Again, cost decreases still can occur as a result of technology, partially offsetting the increases. For most technologies, however, costs in 2030 are above current costs. Plant construction costs in 2030 in the high plant capital costs case are about 50 percent higher than in the reference case. In the falling plant capital costs case, base overnight construction costs for all generating technologies fall more rapidly than in the reference case, starting in 2013. In 2030, the cost factor is assumed to be 25 percentage points below the reference case value. Results Capacity Additions Overall capacity requirements, as well as the mix of generating types, change across the alternative plant cost cases. In the reference case, 259 gigawatts of new generating capacity is added from 2007 to 2030. In the frozen and high plant costs cases, capacity additions fall to 247 gigawatts and 237 gigawatts, respectively. In the falling plant costs case, additions increase to 288 gigawatts. In all the plant costs cases, the vast majority of new capacity is fueled by natural gas, in part because coal, nuclear, and renewable technologies are more capital-intensive; however, the fuel shares of total builds do differ among the cases (Figure 18). Coal-fired plants make up 18 percent of all the new capacity built in the reference case through 2030. Across the alternative cases, their share ranges from 9 percent to 20 percent. In the frozen plant costs and high plant costs cases, no nuclear capacity is built beyond the 1.2 gigawatts of planned additions. In the falling plant costs case, more than 20 gigawatts of nuclear capacity is built. Renewable capacity makes up a 22-percent share of all new capacity built in the reference case; the renewable share remains between 21 and 22 percent in the high plant costs and frozen plant costs cases and increases to 25 percent in the falling plant costs case. Electricity Generation and Prices Differences among the projections for generation fuel mix in the different cases are not as large as the differences in the projections for capacity additions, because the construction cost assumptions do not affect the operation of existing capacity. Coal maintains the largest share of total generation through 2030, ranging from 44 percent to 47 percent in 2030 across the four cases (Figure 19). The renewable share in 2030 is nearly the same in all the cases, from 14 percent to 15 percent, because all the cases assume that the same State and regional RPS goals must be met. In the frozen and high plant costs cases, biomass co-firing is used predominantly to meet RPS requirements, rather than investment in new renewable capacity. In the falling plant costs case, generation from biomass co-firing is less than projected in the reference case, and wind generation provides more of the renewable requirement. Nuclear generation provides 18 percent of total generation in 2030 in the reference case, compared with 16 percent in the frozen and high plant costs cases and 19 percent in the falling plant costs case. Natural-gas-fired generation, typically the source of marginal electricity supply, follows an opposite path, increasing by 22 percent from the reference case projection in 2030 in the high plant costs case and by 14 percent in the frozen plant costs case, and decreasing by 11 percent in the falling plant costs case. As a result, delivered natural gas prices vary among the different cases, increasing by as much as 10 percent from the reference case projection in the high plant costs case and decreasing by 6 percent in the falling plant costs case. Electricity prices in 2030, following the trend in natural gas prices, are 5 percent higher than the reference case projection in the high plant costs case (where electricity prices also rise in response to higher construction costs) and 5 percent lower than the reference case projection in the falling plant costs case (Figure 20).
73. Cambridge Energy Research Associates, “Construction Costs for New Power Plants Continue to Escalate: IHS CERA Power Capital Costs Index” (press release, May 27, 2008), web site www.cera.com/aspx/cda/ public1/news/pressReleases/pressReleaseDetails.aspx ?CID=9505. 74. Cambridge Energy Research Associates, “IHS CERA Power Capital Costs Index Shows Power Plant Construction Costs Decreasing Slightly” (press release, December 17, 2008), web site http://press.ihs.com/ article_display.cfm?article_id=3953.
Contact: Laura Martin
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