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Bottlenecks Aggravate Rising Construction Costs
and making sure they are enforced – but otherwise leaving the market players and consumers free to do as they please. Others interpret their role more broadly, doing good even if it infringes on others’ freedom. Commissioners at the California Public Utilities Commission (CPUC) have traditionally interpreted their mission to go beyond merely setting rates and making sure investor-owned utilities (IOUs) do not earn more than they are allowed. Following the electricity fiasco of 2000-01, they decided that markets have serious imperfections, and consumers need to be protected from market abuse. The commission has defined a pecking order for how utilities would meet customer demand, putting energy efficiency, renewable energy, and other favored schemes ahead of conventional supply-side options. After the passage of California’s climate change law, AB 32, the CPUC has become even more aggressive in pursuit of energy efficiency and renewable energy. It has ordered the IOUs to invest in advanced metering infrastructure (AMI), making it possible to introduce variable time pricing to all customer segments. The agency has essentially banned imports of dirty electricity from out of state. It has introduced a reward and penalty system for utilities to further encourage the delivery of energy efficiency services. In mid-April 2008, Michael Peevey, president of the CPUC, persuaded his fellow commissioners to go one step further by approving the creation of the California Institute for Climate Solutions. The vision is to bring together academic and private laboratories to quickly find ways to cut greenhouse gas emissions. The new institute is clearly intended to support other efforts to cut the state’s emissions to 1990 levels by 2020. That requires a 25 percent reduction from the business-as-usual scenario, a tough target given a 41 percent expected rise in California’s population. To fund the new think tank, the CPUC would instruct the state’s four investor-owned electric and gas utilities which are under its control to add a surcharge of 25 to 30 cents per month to each customer bill for 10 years. That would amount to $60 million per year, or $600 million. The institute must raise matching funds from other sources, making it at May 2008 Vol. 21, Issue 4
least twice as large as the allotted budget. CPUC’s plan does not require the approval of the governor or the state legislature. As it happens, the governor and Peevey see eye to eye on many matters, always supporting one other when it comes to keeping the lights on or cutting back on greenhouse gas emissions. Not surprisingly, Gov. Arnold Schwarzenegger supported the plan, as did the environmental community. Some lawmakers and consumer groups were not so sure, calling it an unfair, regressive tax on the poor. Even within the commission, the decision faced some resistance. At least one commissioner, John Bohn, expressed unease about supporting the new surcharge, saying it pushes the boundaries of the commission’s legal jurisdiction ‘‘almost to the breaking point.’’ In the end, even he was persuaded to vote for the measure, agreeing that, ‘‘it could make positive contributions.’’ Breaking point or beyond, the CPUC does not have jurisdiction over municipal utilities – which means that the surcharge would only apply to the customers of the four large IOUs in California. So consumers in markets like Los Angeles are off the hook. & doi:/10.1016/j.tej.2008.05.006
Bottlenecks Aggravate Rising Construction Costs Rising demand for power in developing countries combined with concerns about carbon emissions from coal-fired power plants in developed countries have created a bonanza for carbon-light technologies, including nuclear, renewables and natural gas plants. This, in turn, has put upward pressure on the price of natural gas in key markets while resulting in shortages in critical components for building renewables and nuclear reactors. Globalization of the power industry means that pressures in one segment or one region translate into shortages and rising prices everywhere else. A case in point is carbon-free nuclear power, now enjoying a strong revival after years of dormancy, with significant investments in building a new generation of reactors expected in the U.S., the U.K., 1040-6190/$–see front matter
7
China, India, Russia, and a number of other major markets. The investors and developers, however, confront a host of shortages and obstacles beyond the usual stringent permitting and licensing issues. Only a handful of companies are capable of manufacturing the highly specialized components of reactors and pressurized vessels – and as orders pile up, the waiting list for deliveries are getting longer. Japan Steel Works Ltd., for example, is one of the few sources of the heavy steel forgings that go into nuclear plants. Chinese manufacturers are trying to find their way into every profitable niche, but that may take some time and require acquiring specialized skills. With plans to build as many as 50 new reactors by 2020, China offers a big market for nuclear manufacturers but could also create bottlenecks in the supply chain. Shortages of skilled engineers, pipe fitters, and welders are also cause for concern, as there are a finite number of them to go around. With a growing number of U.S. utilities lining up to build nuclear power plants, experts reckon completion times would stretch from 2015 to 2020, and that assumes no major regulatory or licensing hurdles. In an interview with The Wall Street Journal in April, Dale Klein, chairman of the Nuclear Regulatory Commission (NRC), expressed concerns about the supply chain, especially now that a literal flood of applications for new nuclear plants are being submitted to NRC. He said, ‘‘The global supply chain is stretched, if not to the breaking point, at least to the tipping point.’’ Referring to the membership of the American Nuclear Society, a key professional association, he pointed out that in 1977, 1,350 American companies were represented. Today, that number is down to 700 – and many of them are foreign-owned. What this means is that many of the critical parts and components are increasingly manufactured outside the U.S., with little NRC oversight or quality control. The same article reported cases where apparently ‘‘shoddy or counterfeit parts’’ have been used in critical parts of operating reactors. Michael J. Wallace, president of Constellation Generation Group, a unit of Constellation Energy, says that in the 1980s, ‘‘we could not remember any piece of equipment that came from 8
1040-6190/$–see front matter
outside the U.S. Now 80 percent of the equipment is going to have to come from offshore.’’ Call it globalization, but that is the reality today. Renewable energy technologies, principally wind and solar, are also enjoying a phenomenal global building boom but also running into similar bottlenecks for critical components, including wind turbine blades, solar modules, and collectors. Conventional coal, currently facing strong opposition in the U.S. and some European countries, has become a non-starter, abandoned by a number of developers who consider it an uphill battle with uncertain prospects given significant uncertainties about future carbon constraints. The short-term void is being filled by natural gas in many cases at a time when supplies are stretched and prices are rising. U.S. power sector demand for natural gas grew 10 percent in the past year alone, according to the Energy Information Administration (EIA), with domestic production flat. Experts have differing opinions, but many project a widening gap between domestic production and consumption, perhaps as much as 20 billion cubic feet by 2025. That gap is expected to be filled by liquefied natural gas (LNG) imports. But the U.S. is not alone in its growing reliance on imported LNG. Once a limited market with a few sellers and buyers, the LNG business has grown into a global commodity with a fleet of specialized LNG cargo ships transporting gas from any shipping to any receiving terminal – the destination determined by the highest bidder. With major swings in demand due to regional droughts, cold or hot spells, or variations in inventory levels, natural gas prices have become volatile, making them susceptible to frequent price spikes with little predictability. Long-term contracts, of course, are one way to get around the price swings but that carries an insurance premium not everyone is willing to pay. Another driver putting upward pressure on prices is the booming economies of developing countries, notably China, India, but also others in the Middle East, Africa, and Asia. China and India combined are sucking up a significant percentage of worldwide supply of power plant equipment components, not to The Electricity Journal
mention primary fuels and commodities. In 2006, China reportedly built some 90 GW of new capacity, mostly coal. India, facing chronic power shortages, has announced plans to add 22 GW of new capacity in the next five years followed by another 70 GW in the following five years. Since there are a limited number of suppliers serving the global market, bottlenecks have appeared, prolonging waiting times for deliveries of critical components and parts. Developers are already complaining about significant delays in construction times for power plants. A relatively trivial combined-cycle plant that would have taken a mere two years to build now takes three or longer and costs substantially more. Rising Utility Construction Costs, a September 2007 report by The Brattle Group for the Edison Electric Institute (EEI), documents recent increases in raw material and commodity costs, such as steel
and cement. Copper wires, for example, have quadrupled in price in the recent past, assuming you can get what you need. The EEI study points out to a ‘‘growing backlog of project contracts at large engineering, procurement and construction (EPC) firms and speculates that future bids may be less cost competitive as ‘‘new construction projects are added to the queue.’’ Cost of steam generation plants, transmission, and distribution rose by 25 to 35 percent from January 2004 to January 2007; gas turbine prices rose 17 percent in 2006 alone, according to the same study. The impact on baseload units such as coal or nuclear plants? Add $20 per MWh to projections. And that is based on data up to 2007. One must presume that things have gotten worse since. & doi:/10.1016/j.tej.2008.05.007
In Washington and States, Coal Battle Intensifies Continued from page 5 from Congress and/or more stringent regulations from the Environmental Protection Agency (EPA) under a new administration after the November 2008 elections. This explains the stiff opposition facing developers of coal-fired plants across the country. Joe Lucas, director of Americans for Balanced Energy Choices, an advocacy group based in Alexandria, Va., likes to remind anyone who is willing to listen that, ‘‘We can’t meet our future energy needs without coal,’’ adding, ‘‘It’s a matter of how we use it. We will use it cleanly.’’ Environmentalists are not buying it. ‘‘They are trying to mislead the public,’’ contends Bruce Nilles, who runs Sierra Club’s national anti-coal campaign, adding, ‘‘They run around saying ‘clean’ like they have created some new version of coal.’’ The public is caught in the cross-fire, not sure which side to believe. The state of Michigan is one of many debating how it should meet its future electricity demand growth. May 2008 Vol. 21, Issue 4
With 19 coal plants already operating in the state, a coalition of environmental groups is fighting proposals for five new plants that need permits from the state’s Department of Environmental Quality. The environmentalists point out that conventional coal-fired plants are a Nineteenth Century technology currently pushed by the power industry to be built before Congress enacts carbon emission regulations. ‘‘If you want to pay more (for electricity), you don’t need coal,’’ counters Lynne Mackey, director of regulatory policy for LS Power, according to the Associated Press. ‘‘But this state wants to compete for jobs. This state has a bigger plan than just achieving a single-minded environmental goal.’’ Nowhere have the battle lines been more tightly drawn than in Kansas, where Rod Bremby, a little-known, unelected state official, decided last October, more or less unilaterally, to decline the permit for two proposed coal-fired plants, citing 1040-6190/$–see front matter
9
least twice as large as the allotted budget. CPUC’s plan does not require the approval of the governor or the state legislature. As it happens, the governor and Peevey see eye to eye on many matters, always supporting one other when it comes to keeping the lights on or cutting back on greenhouse gas emissions. Not surprisingly, Gov. Arnold Schwarzenegger supported the plan, as did the environmental community. Some lawmakers and consumer groups were not so sure, calling it an unfair, regressive tax on the poor. Even within the commission, the decision faced some resistance. At least one commissioner, John Bohn, expressed unease about supporting the new surcharge, saying it pushes the boundaries of the commission’s legal jurisdiction ‘‘almost to the breaking point.’’ In the end, even he was persuaded to vote for the measure, agreeing that, ‘‘it could make positive contributions.’’ Breaking point or beyond, the CPUC does not have jurisdiction over municipal utilities – which means that the surcharge would only apply to the customers of the four large IOUs in California. So consumers in markets like Los Angeles are off the hook. & doi:/10.1016/j.tej.2008.05.006
Bottlenecks Aggravate Rising Construction Costs Rising demand for power in developing countries combined with concerns about carbon emissions from coal-fired power plants in developed countries have created a bonanza for carbon-light technologies, including nuclear, renewables and natural gas plants. This, in turn, has put upward pressure on the price of natural gas in key markets while resulting in shortages in critical components for building renewables and nuclear reactors. Globalization of the power industry means that pressures in one segment or one region translate into shortages and rising prices everywhere else. A case in point is carbon-free nuclear power, now enjoying a strong revival after years of dormancy, with significant investments in building a new generation of reactors expected in the U.S., the U.K., 1040-6190/$–see front matter
7
China, India, Russia, and a number of other major markets. The investors and developers, however, confront a host of shortages and obstacles beyond the usual stringent permitting and licensing issues. Only a handful of companies are capable of manufacturing the highly specialized components of reactors and pressurized vessels – and as orders pile up, the waiting list for deliveries are getting longer. Japan Steel Works Ltd., for example, is one of the few sources of the heavy steel forgings that go into nuclear plants. Chinese manufacturers are trying to find their way into every profitable niche, but that may take some time and require acquiring specialized skills. With plans to build as many as 50 new reactors by 2020, China offers a big market for nuclear manufacturers but could also create bottlenecks in the supply chain. Shortages of skilled engineers, pipe fitters, and welders are also cause for concern, as there are a finite number of them to go around. With a growing number of U.S. utilities lining up to build nuclear power plants, experts reckon completion times would stretch from 2015 to 2020, and that assumes no major regulatory or licensing hurdles. In an interview with The Wall Street Journal in April, Dale Klein, chairman of the Nuclear Regulatory Commission (NRC), expressed concerns about the supply chain, especially now that a literal flood of applications for new nuclear plants are being submitted to NRC. He said, ‘‘The global supply chain is stretched, if not to the breaking point, at least to the tipping point.’’ Referring to the membership of the American Nuclear Society, a key professional association, he pointed out that in 1977, 1,350 American companies were represented. Today, that number is down to 700 – and many of them are foreign-owned. What this means is that many of the critical parts and components are increasingly manufactured outside the U.S., with little NRC oversight or quality control. The same article reported cases where apparently ‘‘shoddy or counterfeit parts’’ have been used in critical parts of operating reactors. Michael J. Wallace, president of Constellation Generation Group, a unit of Constellation Energy, says that in the 1980s, ‘‘we could not remember any piece of equipment that came from 8
1040-6190/$–see front matter
outside the U.S. Now 80 percent of the equipment is going to have to come from offshore.’’ Call it globalization, but that is the reality today. Renewable energy technologies, principally wind and solar, are also enjoying a phenomenal global building boom but also running into similar bottlenecks for critical components, including wind turbine blades, solar modules, and collectors. Conventional coal, currently facing strong opposition in the U.S. and some European countries, has become a non-starter, abandoned by a number of developers who consider it an uphill battle with uncertain prospects given significant uncertainties about future carbon constraints. The short-term void is being filled by natural gas in many cases at a time when supplies are stretched and prices are rising. U.S. power sector demand for natural gas grew 10 percent in the past year alone, according to the Energy Information Administration (EIA), with domestic production flat. Experts have differing opinions, but many project a widening gap between domestic production and consumption, perhaps as much as 20 billion cubic feet by 2025. That gap is expected to be filled by liquefied natural gas (LNG) imports. But the U.S. is not alone in its growing reliance on imported LNG. Once a limited market with a few sellers and buyers, the LNG business has grown into a global commodity with a fleet of specialized LNG cargo ships transporting gas from any shipping to any receiving terminal – the destination determined by the highest bidder. With major swings in demand due to regional droughts, cold or hot spells, or variations in inventory levels, natural gas prices have become volatile, making them susceptible to frequent price spikes with little predictability. Long-term contracts, of course, are one way to get around the price swings but that carries an insurance premium not everyone is willing to pay. Another driver putting upward pressure on prices is the booming economies of developing countries, notably China, India, but also others in the Middle East, Africa, and Asia. China and India combined are sucking up a significant percentage of worldwide supply of power plant equipment components, not to The Electricity Journal
mention primary fuels and commodities. In 2006, China reportedly built some 90 GW of new capacity, mostly coal. India, facing chronic power shortages, has announced plans to add 22 GW of new capacity in the next five years followed by another 70 GW in the following five years. Since there are a limited number of suppliers serving the global market, bottlenecks have appeared, prolonging waiting times for deliveries of critical components and parts. Developers are already complaining about significant delays in construction times for power plants. A relatively trivial combined-cycle plant that would have taken a mere two years to build now takes three or longer and costs substantially more. Rising Utility Construction Costs, a September 2007 report by The Brattle Group for the Edison Electric Institute (EEI), documents recent increases in raw material and commodity costs, such as steel
and cement. Copper wires, for example, have quadrupled in price in the recent past, assuming you can get what you need. The EEI study points out to a ‘‘growing backlog of project contracts at large engineering, procurement and construction (EPC) firms and speculates that future bids may be less cost competitive as ‘‘new construction projects are added to the queue.’’ Cost of steam generation plants, transmission, and distribution rose by 25 to 35 percent from January 2004 to January 2007; gas turbine prices rose 17 percent in 2006 alone, according to the same study. The impact on baseload units such as coal or nuclear plants? Add $20 per MWh to projections. And that is based on data up to 2007. One must presume that things have gotten worse since. & doi:/10.1016/j.tej.2008.05.007
In Washington and States, Coal Battle Intensifies Continued from page 5 from Congress and/or more stringent regulations from the Environmental Protection Agency (EPA) under a new administration after the November 2008 elections. This explains the stiff opposition facing developers of coal-fired plants across the country. Joe Lucas, director of Americans for Balanced Energy Choices, an advocacy group based in Alexandria, Va., likes to remind anyone who is willing to listen that, ‘‘We can’t meet our future energy needs without coal,’’ adding, ‘‘It’s a matter of how we use it. We will use it cleanly.’’ Environmentalists are not buying it. ‘‘They are trying to mislead the public,’’ contends Bruce Nilles, who runs Sierra Club’s national anti-coal campaign, adding, ‘‘They run around saying ‘clean’ like they have created some new version of coal.’’ The public is caught in the cross-fire, not sure which side to believe. The state of Michigan is one of many debating how it should meet its future electricity demand growth. May 2008 Vol. 21, Issue 4
With 19 coal plants already operating in the state, a coalition of environmental groups is fighting proposals for five new plants that need permits from the state’s Department of Environmental Quality. The environmentalists point out that conventional coal-fired plants are a Nineteenth Century technology currently pushed by the power industry to be built before Congress enacts carbon emission regulations. ‘‘If you want to pay more (for electricity), you don’t need coal,’’ counters Lynne Mackey, director of regulatory policy for LS Power, according to the Associated Press. ‘‘But this state wants to compete for jobs. This state has a bigger plan than just achieving a single-minded environmental goal.’’ Nowhere have the battle lines been more tightly drawn than in Kansas, where Rod Bremby, a little-known, unelected state official, decided last October, more or less unilaterally, to decline the permit for two proposed coal-fired plants, citing 1040-6190/$–see front matter
9