New-build power station costs up 30% as demand outstrips supply

London (Platts)--23Apr2007

The global boom in coal-fired generation equipment orders, rising
material costs and margin improvement by suppliers have forced new-build power
station costs up by as much as 30% since 2005, European power plant developers
told Platts April 20.

The hikes have come in two waves. Power generation equipment prices fell
over a four-year period to 2004 as orders were few and far between, and
competition among the big suppliers--GE, Alstom and Siemens--was fierce.

"Over the next 18 months to mid-2006 prices rose about 15% as suppliers
sought to improve margins," said an independent developer with several CCGT
projects in continental Europe. "And now we've seen another 10-15% increase on
the back of rising material costs, especially steel, and rising sub-contractor
costs."

Some suppliers are refusing to fix the price of contracts in full until
an order is firm, the developer said. "We are seeing some quotes in the market
where suppliers are taking key items like boilers out and saying 'it is what
it is when you place your actual order'. So you can sign a contract not
knowing what the full price impact will be six or nine months later."

For a number of years, given low orders, capacity in specialist
manufacturing centers (such as for boiler tubing) was steady. Now orders are
ramping up, existing capacity is stretched.

E.ON UK's head of new build projects Martin Land told Platts that timing
was important in equipment procurement, and the surer the timetable the better
for all concerned: "It is evident that the proposed level of investments in
new power projects will present a challenge for equipment and labour,
especially coming after a period of consolidation by main equipment
suppliers," Land said.

"We believe that suppliers have the ability to deliver cost effective
projects, and that commodity cost issues can be managed, but clients do need
to give suppliers certainty on timescales, which are partly restrained by the
lack of surety on consenting and future energy policy."

E.ON UK has just awarded the contract to build a GBP500 million ($1,001
million), 1,275-MW gas-fired combined heat and power plant on the Isle of
Grain to French engineering firm Alstom. The contract was awarded after a
competitive tendering process and achieved "an award decision and order
placement in line with our planned timescales," Land said.

Henry Edwardes-Evans, henry_edwardes-evans@platts.com