Michael Mariotte from NIRS Needs to Update His Cost Sources

Tampa Tribune’s “Nuclear Costs Explode” piece provided some updated insights to the estimated costs of a new nuclear plant. The article began with Progress Energy’s cost reassessment of a new nuke from an initial estimate of about $5-7 billion per plant. “Based on new industry estimates, the tab for Progress Energy's project could surpass $10 billion.” The reason for the increase:

because the cost of concrete, steel, copper, labor and reactor technology has soared as energy companies move forward with plans to build more than 30 new reactors nationwide. Also, Progress Energy's initial estimate excluded the cost of land, inflation, interest payments and new transmission lines.

…

A September 2007 report commissioned by the Edison Electric Institute, a nonprofit trade group for the nation's electric utilities, showed that steel prices have risen 60 percent since 2003. Copper prices nearly quadrupled between 2003 and 2006 and cement prices rose 30 percent during the same period, the report said.

The nuclear industry is keenly aware of these commodity price increases, so this wasn’t exactly news. What caught my attention, though, was the quote from Michael Mariotte of the Nuclear Information and Resource Service:

"Moody's is closer to the reality we're seeing," said Michael Mariotte, executive director of the Nuclear Information and Resource Service, a nonprofit group opposed to nuclear power. "Even before they start building, the costs are going up. Meanwhile, the cost for solar, wind and energy efficiency are on a downward trend."

Notice the last sentence. Apparently Mr. Mariotte is unaware solar and wind rely on these commodities as well. It would be shortsighted for him to think commodity prices only affect nuclear plants.

When pulling together updated sources for Mr. Mariotte, I found little cost information for solar. The prime reason is because only 100 MW of solar capacity have come online in the past three years compared to nearly 11,000 MW of wind since 2005 (source: Global Energy Decisions’ database). The cost trends for wind are easily measured. In contrast, solar data is sparse.

Below are several pieces on the effect of increasing commodity prices on the wind industry. Here’s a New York Times piece from July 2007:

Renewable energy is not immune. “Costs have increased for wind as they have for other technologies,” said Christine Real de Azua, a spokeswoman for the American Wind Energy Association. “While wind farm operations are not hit by fuel price volatility, steep increases in the cost of raw materials like copper and steel and other factors have driven up the price of wind turbines,” she said in an e-mail statement.

Her association recently republished data from a utility that buys large amounts of wind power, Puget Sound Energy, showing that prices in 2006 ranged from about 8 cents to 10.5 cents a kilowatt-hour, up from 2004, when it was 4.5 to 6 cents. A recent study by the National Renewable Energy Laboratory, part of the Department of Energy, showed a steadily declining price from 1999 to 2005, but an increase in 2006. The study said that wind power was generally competitive with other sources of energy but that rising costs were “starting to erode that value.”

Here is the NREL Annual Report on wind (pdf) the NYT references:

More recently, however, costs have increased: among our sample of projects built in 2006, reported installed costs ranged from $1,150/kW to $2,240/kW, with an average cost of $1,480/kW – up $220/kW (18%) from $1,260/kW in 2005.

Moreover, there is reason to believe that recent increases in turbine costs did not fully work their way into installed project costs in 2006 – the average 2006 cost estimate for proposed projects in our sample (not shown in Figure 18) was $1,680/kW, or $200/kW higher than for projects completed in 2006. Anecdotal information from industry suggests that project costs may reach an average of $1,800/kW or higher in future years. (p. 15)

EIA’s Annual Energy Outlook 2007 (pdf) published nearly a year ago devoted six pages to the “Impacts of Rising Construction and Equipment Costs on Energy Industries”:

Costs related to the construction industry have been volatile in recent years. Some of the volatility may be related to higher energy prices. Prices for iron and steel, cement, and concrete—commodities used heavily in the construction of new energy projects— rose sharply from 2004 to 2006, and shortages have been reported. (p. 36)

For the best source on recent construction price increases, check out the Edison Foundation’s (EEI) “Rising Utility Construction Costs” paper (pdf). This paper analyzes the effects construction commodity prices have had on the entire power sector. What the reader may be wondering, though, is what’s causing these prices to increase. Read below:

Broadly speaking, there are four primary sources of the increase in construction costs: (1) material input costs, including the cost of raw physical inputs, such as steel and cement as well as increased costs of components manufactured from these inputs (e.g., transformers, turbines, pumps); (2) shop and fabrication capacity for manufactured components (relative to current demand); (3) the cost of construction field labor, both unskilled and craft labor; and (4) the market for large construction project management, i.e., the queuing and bidding for projects. (p. 13)

Electricity consumers beware; check out the last sentence in the conclusion:

In the long run, customers ultimately will pay for higher construction costs—either directly in rates for completed assets of regulated companies, less directly in the form of higher energy prices needed to attract new generating capacity in organized markets and in higher transmission tariffs, or indirectly when rising construction costs defer investments and delay expected benefits such as enhanced reliability and lower, more stable long-term electricity prices.

The nation faces a tremendous challenge in rebuilding and expanding the infrastructure that provides the reliable electricity on which our economy now depends. Electricity prices are expected to rise substantially in the next 10 years as utilities tackle the backlog of generation and transmission projects needed to replace outdated plants and meet new demand. The rise in commodity, labor, and component prices is affecting projected costs for all new electric generating projects, not just (and not uniquely) nuclear.