21.12.2009 Power Engineering Int.
The latest IHS CERA Power Capital Costs Indexes (PCCI) for North America and Europe show that power sector construction costs continued to decline in third quarter 2009—but at a slower rate than in the previous quarters in 2009. This slower pace shows considerable resilience to downward price movement despite continued weakness in new plant construction orders.
A proprietary measure of project cost inflation similar in concept to the Consumer Price Index (CPI), the IHS CERA PCCI tracks the costs of building coal, gas, wind and nuclear power plants in both regions and is indexed to the year 2000. The PCCI for North America now registers 213 index points (down by 1.8 per cent from 217 at the end of Q1 2009), indicating that a portfolio of power plants that cost $100bn in 2000 would, on average, cost $213bn today.
The PCCI index for the European portfolio, calculated in euros, is at 177, down by 5.9 per cent over the same six-month period.
«Considering the reduction in electricity consumption and the drop across the board in industrial construction since the 2008 downturn, the decline in power construction costs has been somewhat muted,» said Candida Scott, IHS CERA Senior Director of Cost and Technology. «While costs have yet to find their bottom, one can expect that they will remain relatively resilient to downward pressure.»
IHS CERA estimates that electricity demand has fallen approximately 3 per cent in North America and 5 per cent across Europe in 2009 in part due to the recession. The reduction in demand has driven many projects into delay or cancellation. North American demand is not expected to return to its historical 2007 peak until 2012 and European demand is not expected to reach its 2008 peak until 2013, meaning a reduced need for new power plant projects in the coming years.
Europe’s more pronounced decline in costs was augmented by the strengthening of the euro to the US dollar and has had strong impact on reducing the cost of equipment sourced from global markets. The PCCI for both regions tell a similar story, however.
Equipment manufacturers are feeling the effects of reduced demand outlook, with new orders down in most sectors. But major equipment suppliers still show resilience to large downward price movements, with only modest falls of between 2 and 5 per cent in the major global equipment markets for power plants. The market for coal fired boilers has been weakest in the face of the very uncertain outlook for coal in both North America and Europe. Primary markets for steel and ancillary equipment have also dropped by similar percentages, but the rising copper price has supported the price of electrical equipment.
«The reasons for manufacturers’ resilience to price reductions vary significantly by equipment – anywhere from an expectation of a market rebound in 2010 to the lack of market price sensitivity,» said Roger Kranenburg, IHS CERA Director. «On the other hand engineering companies have cut costs to the bone in this environment of few projects. This is quite a contrast to the not too distant past where projects were inked more on the engineering company’s terms.»
Engineering companies have struggled to keep workforces employed as current projects near completion and have taken action to reduce costs amidst increased competition for new work. While the engineering market across the power sector is soft, nuclear power appears to be bucking the trend as nuclear engineers remain in short supply.
«The engineers who built the last generation of nuclear plants are graying, and replacing them presents a potential bottleneck for the nuclear sector for a few years, keeping engineering costs up in that sector,» said Deborah Mann, IHS CERA Director. «The outlook is good for more wind farms given the need to meet environmental targets, but wind projects have limited engineering content, so this will not make up for the lack of other opportunities for power projects.»
The PCCI for North America and Europe both show gradually increasing labour costs, but for very different reasons. In North America labor contractors have cut fees and overheads, thus the increase reflects a recovery in salaries. In contrast to North America, construction labor costs in Europe increased slightly as migrant workers from Eastern European countries with lower wage rates have returned home as the economic performance of their host countries wane.
IHS CERA expects further declines in power capital costs for the short term, driven by modest falls in equipment markets. However, increasing commodity and labor costs will mitigate the reduction in equipment prices to a certain degree