15.07.2010 Power Gen Worldwide
The latest IHS CERA Power Capital Costs Indexes (PCCI) for North America and Europe show that power sector construction costs rose slightly during the Q3 2009 – Q1 2010 period for the first time since 2008.
Costs continued to show 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 215 (up one percent from 213 at the end of Q3 2009), indicating that a portfolio of power plants that cost $100bn in 2000 would, on average, cost $215bn today. The PCCI index for the European portfolio, calculated in euros, is at 182, up three per cent over the same six-month period.
The increases to the PCCI were driven primarily by rising commodity prices fueled by global supply and demand factors and Asia’s high growth coming out of the recession. Steel costs for North America and Europe rose two per cent and six per cent, respectively. Electrical bulk costs, driven by rising copper prices, posted the largest increases in both North America (15 per cent) and Europe (22 per cent).
But the slight rise in the index scores does not necessarily represent the beginnings of a shift in the prevailing cost environment, said IHS CERA Senior Director of Cost and Technology, Candida Scott.
“Despite the slight rise in costs, the results of the PCCI reflect more continuity than change,” Ms. Scott said. “Costs have remained relatively the same for the past year, displaying resiliency to downward pressures such as reduced electricity consumption and reduced construction activity.”
Europe’s larger increase in costs was augmented by the weakening of the euro against the US dollar, which led to the increase in the costs of equipment sourced from global markets.
Several trends were common for both regions, however. In addition to the volatility of commodities, the market for major equipment remains on a downward trend as a result of weak demand and greater competition among manufacturers. Engineering and project management costs were also relatively flat for both regions. Having cut margins as much as they can, firms are managing the downturn through more flexible contract terms.
“Strong competition among manufacturers is keeping major equipment and plant cost increases in check despite rising commodity prices,” said IHS CERA Director, Roger Kranenburg. “International manufacturers are increasingly targeting North American markets such as gas turbines and onshore wind turbines.”
Construction labor costs for both regions rose slightly (one percent) but are on diverging paths, the indexes find. Labor costs for North America are trending upward due to rising wages and stabilized profit margins, while downward pressure on European wages continues as a result of low production levels in construction that have fallen to their lowest level since 1997.
“Europe’s situation is compounded by the fact that it is pulling out of the recession more slowly than other regions,” said IHS CERA Director, Deborah Mann. “Europe could be facing a situation where costs are being driven upward by global markets while demand for power projects within Europe itself remains suppressed.”
IHS CERA expects power capital costs to remain relatively flat for the short term with additional decreases in major equipment costs as the market awaits recovery.