Shifting powerplant markets, supply bottlenecks, volatile equipment prices, global competition for powerplant materials and shortages of specialty craft and professional labor have conspired to produce what one source calls sticker shock” for powerplant owners. Price escalation is up from five years ago, driven by market conditions that have allowed “profiteering” by makers of specialty products, according to another source.
Shaw Power Group/Mark Banks
Costs of specialty metals as well as commodities have been driven by global demand.
Coal-fired powerplants have held the field for the last four or five years, but they are about to yield to combustion turbines. That shift and the gathering momentum for new nuclear power construction portend many new challenges for a construction market that has already been through the cost-escalation wringer in recent years.
As recently as 2004, all-in cost for a standard pulverized-coal-fired powerplant was $1,000-$1,200 per kilowatt, says Eric Oldenhuis, director of proposals for Kansas City-based Black & Veatch’s energy division. “Now, that’s north of $3,000 per kW,” he says.
The escalation has produced sticker shock for some owners, says Jim Scotti, senior vice president and chief procurement officer at Fluor Corp., Irving, Texas. “Today we are paying more than twice as much for fabricated structural steel as we did in 2003. However, we are currently looking at only modest escalation in 2009 of 3% to 6%,” he says.
Steel prices just this year are up 30%, commodities 15% and fuel prices 30% to 40%, says Lynn Gourley, director of construction services at Day & Zimmermann, Philadelphia. “Contractors have to explain these increases to get owner acceptance,” he says.
Steel price escalation has had an enormous impact on powerplant costs because they use so much steel. One steel fabricator has filed a class-action lawsuit against eight steel makers alleging price fixing since 2005 (see p. 32). If collusion is proved, that could explain the cost escalation observed by Steve Marando, director of estimating for the fossil power group of Shaw Group Inc., Boston. “It’s not like the ’90s, where you could add 2% per year and be happy,” he says.
But what Marando has experienced is more unpredictability than escalation, he says. Steel products had price spikes last year, but before that, it was copper products. Now, copper products seem to have peaked and are coming down, he says. Copper costs fluctuate between $3 and $4 per lb, up from less than $1 in 2000.
Costs of rebar, concrete and copper are driven by low U.S. inventories, the weak dollar and strong global demand, says Larry Dinger, division director of procurement and materials management for URS Power, Princeton, N.J. Steel has gone up 15% to 20% in the last six months, and alloy piping for powerplants 30% to 35%, says George Nash, URS Power president. Dinger expects escalation at this rate to continue through 2009.
Volatile commodities in 2007-08 have been hot-rolled coil, which went from $600 per ton to $1,200; steel plate, which “didn’t quite double;” rebar, which also rose from $600 to $1,200 per ton; and structural-steel sections, up from $800 to $1,100 per ton, says Marando. “Anything related to steel is very volatile, and not steady growth,” he says. “A specific size of pipe could get a spike.”
But powerplants require high-nickel-alloy pipe because of extreme operating temperatures, and only a few mills throughout the world make the specialty pipe, says Oldenhuis. During the boom in combined-cycle powerplants in 2000, he saw about 8% escalation on pipe. But since 2004, he has seen cost escalation of 20% to 40% per year.
Adding to price pressure, fabrication shops and equipment suppliers are operating near capacity. “We’re still in a suppliers’ market. They’re picking and choosing who they want to do business with,” says Fluor’s Scotti.
North American fab shops are running at 80% to 100% loading, and shops elsewhere are pretty strong too, says Scotti. Many expanded during the last boom a decade ago but were left with unused capacity when the boom ended.
Now, a global construction boom for oil refineries is making demands on the same shop capacity as the power industry. As a result, pipe delivery lead times have doubled over those of five years ago. “You’ve really got to pay attention to lead times,” Scotti says. “Lead times quoted today are really more important than price.” The combination of scrap prices and shop loading helps explain why escalation for seamless and welded 2-in. to 8-in. pipe today is 20% to 25%.
Logistics costs are the surprise to watch for, Scotti says. Shippers’ capacity is stretched, and transportation now is 10% to 20% of the cost of materials because of fuel cost, capacity constraints, high demand and, for non-containerized shipments like tanks, “breakbulk.” Demand for “breakbulk” ships, which carry cargo that can’t be containerized, is near 100% of capacity, he says. Procurement managers can’t treat shipping as an afterthought now. They have to book the carrier when they place an order to be sure of the space, he says.
Labor costs have increased 10% to 15% in some locations this year, says Gourley, and labor is where the long-term cost pressures are. Day & Zimmermann is paying per diem to attract labor. Just this month, the company boosted per diem in Houston from $100 to $150. Labor shortages are more pronounced in the power market than in some others because both nuclear and fossil-plant projects require drug screening, says Gourley. “That’s not as common in building construction,” he says.
A rule-of-thumb breakdown for powerplant costs is 60% materials and equipment, 25% construction labor and 15% engineering and design, says Scotti. But URS’s Nash says engineering cost is 7% to 8% for a shorter-duration job. That could be 12% to 15% for a first-of-a-kind project, adds URS’s Dinger.
URS Power is shielding clients from market volatility by keeping its own price escalation stable. Escalation of 4% to 5% is normal now, double the 2%-to-3% rate of 2000-02, says Nash. “We don’t want to price in the kind of escalation we’ve seen in the last six months,” he says.
“Projects that have a longer schedule expose you to escalation,” says Nash. Typical powerplant construction schedules are one year for a simple cycle, two years for a combined cycle, four for a pulverized-coal plant and six to seven for a nuclear plant, he says. Early procurement of long-lead items reduces escalation. Typically, such items are 35% of a nuke, 40% of a coal plant and 50% of a combined-cycle plant, he says. The percentage of escalation would be the same for all, but the dollar value would be greater because the escalation is compounded, like a compound interest rate.
Nash foresees long-term pressure on construction costs because the current stock of powerplants is 40 to 60 years old and will have to be replaced. The long hiatus in nuclear powerplant construction will result in cost pressures showing up early in engineering, because the industry is short of nuclear engineers. Dinger estimates cost for a new nuclear unit of about $5,000 per kW. In the original wave of nuclear construction, the comparable cost was about $2,000 per kW.