IHS CERA: Power Plant Construction Costs Continue to Fall, but Decline is Limited

CAMBRIDGE, Mass.--(BUSINESS WIRE)--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 percent from 217 at the end of Q1 2009), indicating that a portfolio of power plants that cost $100 billion in 2000 would, on average, cost $213 billion today. The PCCI index for the European portfolio, calculated in euros, is at 177, down by 5.9% 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 percent in North America and 5 percent 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 U.S. 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 percent 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 labor 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.

About the IHS CERA Power Capital Costs Index (PCCI)

The IHS CERA PCCI tracks the costs of equipment, facilities, materials and personnel (both skilled and unskilled) used in the construction of a geographically diversified portfolio of more than 30 power generation construction projects throughout North America. The PCCI for Europe is based on a separate diversified portfolio of European projects. The PCCI is analogous to the consumer price index (CPI) in that it provides a clear, transparent benchmark tool for tracking and forecasting a complex and dynamic environment. The PCCI for each of the two portfolios can be tracked on the IHS Index Web Site at www.ihsindexes.com. The PCCI is a work product of IHS CERA’s Capital Costs Analysis Forum for Power (CCAF-P). For information on the Capital Costs Analysis Forum for Power, contact Candida Scott at cscott@cera.com.

About IHS CERA (www.ihscera.com)

IHS CERA is a leading advisor to energy companies, consumers, financial institutions, technology providers and governments. IHS CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. IHS CERA is based in Cambridge, Mass., and has offices in Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City, Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo and Washington, D.C.

About IHS (www.ihs.com)

IHS (NYSE: IHS) is a leading global source of critical information and insight dedicated to providing the most complete and trusted information and expertise. IHS product and service solutions span four areas of information that encompass the most important concerns facing global business today: Energy, Product Lifecycle, Security, and Environment, all supported by Macroeconomics. By focusing on our customers first, IHS enables innovative and successful decision-making for customers ranging from governments and multinational companies to smaller companies and technical professionals in more than 180 countries. IHS is celebrating its 50th anniversary in 2009 and employs more than 4,150 people in 23 countries.

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