Asian Energy

To keep the industrial revolution humming in Asia in 2006 and 2007, China and India needed to build new coal-fired power plants. In fact, the number of power plants developed in Asia is so staggering that its impact is being felt by U.S. utilities.

In 2006, China built 90,000 megawatts of coal-fired power plants, which exceeds the entire generation capacity of the United Kingdom by 13,000 megawatts, notes Jeremy Carl, a research fellow at Stanford University's program on energy and sustainable development. India built 22,000 megawatts of new electricity plants in the last five years and has plans to add 70,000 megawatts in the next five years, though Carl expected only 45,000 megawatts to be completed.

What impact is this massive, unprecedented power generation in Asia having on U.S. utilities? Carl says that Asia's electricity boom is causing them several problems. "China has vacuumed up the technology and personnel needed to implement these power plants," he says. Hence, domestic utilities are having problems with "equipment availability, getting construction equipment on time, and obtaining the necessary number of engineers," he says.

Because of this development in Asia, material costs of steel and copper have been skyrocketing. Carl says the increasing cost of capital development may limit the building of coal-fired power plants in the United States, which are already more expensive to build than natural gas plants. "With regulatory uncertainty involving carbon emissions, it's hard to justify spending $2.5 billion to build sizable coal plants and then have to make major modifications," he asserts.

Based on the worldwide demand for raw material and equipment, Siemens, which provides equipment and oversees building of coal, steam and natural gas power plants, has been facing delays on orders of steel fabrications and piping, explains Phil Karwowski, Siemens' director of energy solutions for the Americas, based in Orlando. A combined cycle power plant that took 24 months to build several years ago now takes 30 to 32 months because of the competition for equipment and raw material.

Utilities are therefore confronted with sticker shock because of raw material price increases. Copper, which cost $1 a pound four years ago, skyrocketed to $4 a pound, so a $1 million purchase of copper wiring for a new power plant now costs $4 million, Karwowski points out. Moreover, the dollar is weak compared to foreign currencies, so purchasing any equipment or material overseas is more costly.

Labor costs are also on the rise in certain markets. Power plant contractors must compete with oil and gas projects for welders and pipefitters. Moreover, companies like Siemens are in a worldwide competition to hire qualified engineers who are in considerable demand.

Material Impact

Because of rising costs combined with pressure from environmental groups and an expected restriction in carbon emissions in the future, many U.S. utilities are exploring alternatives to building coal-fired electricity plants. Siemens has been ramping up building new natural gas plants, particularly in Utah, California, Oregon and Washington. Utilities are developing natural gas plants, which are often smaller in square footage and infrastructure and can be built in half the time of coal plants and usually at one-third to one-half the price, Karwowksi notes.

As the utility with the largest capital construction program in the United States, AEP has been contending with the effects of the spike in Asian power plant construction. It faces increased costs for nickel and zinc and has "to get into the queue for supplies such as cranes," explains Nick Akins, AEP's executive vice president for generation, who is based in Columbus, Ohio. Material costs have been rising at the rate of 10 percent a year, and Akins expects an 8 percent increase this year.

To counteract the wait for materials, AEP pre-ordered supplies for the building of its new ultra coal John W. Turk coal plant in Arkansas, which it expects to gain regulatory approval early this year. "We locked in orders for boilers, highly specialized tubs, and steam generators," Akins says. If construction begins in 2008, it is expected to take three years to complete. Had AEP waited to order materials after approval, construction might have been extended another two years because of equipment delays.

Meanwhile, the demand for renewable and nuclear energy components is also going through the roof. "The queue for vessels is so backlogged that they would be delivered in 2015," Akins notes. A nuclear plant begun in 2008 would likely not be finished until 2020. That's why utilities must plan five years in advance. Southern Company, for example, is competing with other industrial enterprises for parts and workers.

To be sure, some experts say that the rise in utility components is because of regulatory pressures and specifically those tied to climate change. Nevertheless, there is little disagreement that global competition is creating price pressures.

Eric Smith of the Entergy-Tulane Energy Institute says the price increases associated with new Asian plants are not the major stumbling block. "It's part of the equation but not the major variable. Ask any utility that uses coal in great qualities and they'll say they can handle these other issues and still deliver enough power to satisfy everyone." Environmental opposition and regulatory issues last year helped stop 31 coal plans.

While true, there's little doubt that raw material costs are going up in some measure because of new construction in Asia. That means ratepayers will get hit. In other words, new power projects in China and India are affecting the cost and timetable of proposed power projects from California to Connecticut.

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