Power plants are a key component of our critical infrastructure but must remain profitable for investors in order to continue operations. A fundamental factor affecting the profitability of power plants is the total construction cost to bring the facility online. Just as power plants themselves are complex facilities, power plant construction costs are inherently complex. Construction costs for new power plants vary widely depending on the type of electricity generation technology they are harnessing. Both fuel consuming and non-fuel consuming power generation facilities have substantially different construction costs.
Additionally, new construction costs for power plants are moderated by a number of other factors. Some of these factors are inherent to the power producing industry itself. For example, the regulatory environment, access to infrastructure, and the cost of the technology supporting the plant all influence the final construction cost. When discussing power plant construction costs, it is also important to understand how current dynamics in the construction industry as a whole can affect power plant construction costs. These include volatility in core material components for power plants, such as steel or metals, as well as an existing shortage of skilled labor within the construction industry. In this article, we’ll discuss power plant construction costs in the context of the moderating forces affecting costs both specific to power plants as well as forces affecting the construction industry in general.
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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.
Power plants that relied on the wind as a renewable energy source added the most capacity to the power grid in 2015, without adding to much to fuel costs. Harnessing wind as an energy source has steadily been on the rise in the United States. In 2015, power plants harnessing wind energy added 8,064 megawatts (MW) of capacity. Contrast this with petroleum-based generation plants which added 45 MW of capacity and you can see the explosive growth of power plants reliant on wind energy. Wind power plants were constructed with an average cost of $1,661 per kilowatt of installed nameplate activity. This resulted in a total construction cost of $13,395,684 for 66 generators.
It is important to note that the construction of wind generators is heavily reliant on the current regulatory landscape and generation costs. To illustrate this, consider that power plants reliant on wind energy added less than 900 MW of capacity in 2013 according to this report by the EIA, in contrast to the addition of over 8,000 MW in 2015. The most influential reason for this was the expiration of a federal production tax credit at the end of 2012, which encouraged investors to move away from new construction of wind power generators until the tax credit was renewed in early 2013. Given the lag time in production, the increased capacity added in 2015 can be seen as a renewed investment once a more favorable regulatory environment was present.
Power plants that utilize natural gas have been prime drivers for increased grid capacity in recent years, and 2015 was no exception. During 2015 a natural gas power plants added a total capacity of 6,549 MW. Natural gas power plant construction costs for the same year averaged $812/kw, for a total cost of $5,318,957 for 74 generators. There are three different types of technology that are utilized in natural gas power plants. Each different technology has a substantial impact on the total construction costs. The majority of capacity was added through combined cycle natural gas power plants (4,755 MW) and combustion turbine (1,553), while internal combustion engines accounted for only a small fraction of the capacity added (240). This doesn’t tell the complete story, however.
Combined cycle plants, defined as having at least one combustion turbine and one steam turbine, operate at much higher efficiency levels than the other types. While this lowers operating costs over the long-term, capital costs for construction are also higher. Combustion turbine natural gas power plants are less efficient than combined cycle, which results in higher operational costs, but are also less expensive to build. Both internal combustion engine and combustion turbine power generators have the added advantage of being able to be built more quickly than combined cycle power plants. This has led to their use in situations where short-term capacity increases are needed to meet rising demand. Additionally, although combustion turbine plants are less efficient, they tend to only be run at peak times in order to meet demand. In contrast to this, combined cycle plants tend to be used to meet baseline demand loads due to their higher efficiency and lower operating costs.
Solar power plant construction cost, like those for natural gas, is also highly dependent on the underlying technology utilized in the plant. Additionally, the capacity generated by solar power plants is also dependent on the technology utilized. Because of this, the intersection between construction costs and the productive capacity of solar power plants is a central consideration for investors. The average construction cost for all types of solar photovoltaic (PV) power plants was $2,921/kw for a total capacity increase of 3,192 MW. Total construction costs for solar PV plants was $9,324,095 for 386 total generators. These numbers demonstrate that solar plants on average yield less capacity increases per generator when compared to both natural gas and wind. Production levels aren’t static across different types of solar PV installations.
A key difference is between fixed-tilt and axis-based tracking installations. Axis-based tracking systems are more expensive to install, but result in a higher production capacity than fixed tilt, which may help offset ongoing operational costs. Another factor to consider is the type of solar PV installation. The two primary types present on the market are crystalline silicon and thin-film CdTe. These different types have advantages and disadvantages. Thin-film technology is newer, and thin-film plants have a significantly increased average capacity (74 MW vs 7 MW) over crystalline silicon plants. Both plant types are similar in price to construction. For example, for axis-based tracking installations crystalline silicone plants averaged $2,920/kw in cost versus thin-film plants which averaged $3,117/kw. Crystalline silicon installations of both fixed and axis-tilt types vastly outnumbered thin-film installations during 2015, showing a clear market preference for crystalline silicon solar power plants for 2015.
Power plants harnessing nuclear energy remain a core component of our energy infrastructure despite the fact that few nuclear power plants have been built in recent years. In fact, the most recent nuclear power plant to finish construction was the Watts Bar Unit 2 plant completed in 2016. This plant was finished after decades of delays, and was brought online nearly 20 years after the previous nuclear power plant was finished in the United States in 1996, which was the Watts Bar Unit 1. Because of the lack of new construction for nuclear plants there aren’t completely accurate or up-to-date nuclear power plant construction costs available. An economic outlook released by the EIA in 2018 proposed that nuclear power plants begun in 2016 would have a base overnight cost of $5,148, not accounting for fluctuations that may occur during the interim. One key thing to note about the nuclear industry and nuclear powerplants is the significant time required to complete construction. According to the EIA, the soonest a nuclear reactor and power plant could be brought online if construction was begun in 2016 is 2022. This makes nuclear power plant construction more vulnerable to cost overages if construction costs as a whole continue to rise as they have.
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.