November 26, 2008 Unrelenting growth in power consumption, a switch for cleaner energy sources, pollution control efforts and pent-up demand for new generation sources have all combined to create a boom in power plant building in recent years.
The power plant boom may continue because of this demand, even with a credit crisis that gained steam in the summer and caused stock markets to plunge in the fall. Large plants that take years to plan and then construct can't simply be stopped once they reach a certain point.
Total power construction spending last year reached $53.4 billion, a 34 percent increase from $39.8 billion in 2006, according to new figures released by the U.S. Census Bureau. It's necessary to support an expected growth in energy demand of 30 percent by the year 2030. In all, the United States will need to build 151 gigawatts of new generation by that time, according to the Brattle Group that performed a study for the Edison Electric Institute.
A high level of construction and investment has been occurring recently, including more in renewable energy and gas generation because of the speed in which it can be built. Before that, some of the failings of deregulation threw utilities for a loop and slowed things down. One factor that may have skewed recent construction spending is projects and plans to cut sulfur dioxide and nitrogen oxide emissions from coal-fired plants in 28 states, mostly in the Midwest, as directed by the Environmental Protection Agency three years ago.
In the Clean Air Interstate Rule (CAIR) decision, the U.S. Court of Appeals for the District of Columbia over the summer struck down a 2005 directive from the EPA that sought to reduce the amount of SOx and NOx from power plants in one state that then settle downwind in another. The EPA has asked the Court of Appeals for a rehearing. The case could still end up in front of the U.S. Supreme Court. But since the summer ruling, some utilities have ceased or scaled back spending on these construction projects awaiting the outcome of the case.
Natalie Rolph, economist at Black & Veatch, said the ruling's impact is not entirely clear. "This has to be put in the context of new versus existing plants since the CAIR rule was vacated. 2008 was a year of a heavy amount of construction for SOx and NOx control on existing generation. You might expect a slowdown or at least some of the projects will be put on hold."
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But that uncertainty -- along with favorable tax treatment and state mandates -- has propelled the interest in renewable energy, particularly wind. A year-long extension of the production tax credit was included in the financial bailout bill, which will keep the 2 cent per kilowatt-hour subsidy in place through 2009. Also, about 30 states now have a renewable energy portfolio standard mandating a percentage of electricity sales come from renewable energy by a fixed date.
For its part, wind generation earned $9 billion in investment in 2007 and added 5,244 megawatts of capacity. Solar PV is also growing in the U.S., with at least 450 MW installed. Utilities are expanding rooftop PV capacity and Southern California Edison plans to install 250 MW of distributed capacity over 65 million square feet of roofs in the next five years. PG&E plans to help California's goal of 3,000 MW of customer-installed solar power by 2017.
Planned investments in nuclear power have prompted one company with incentives to expand its operations. Engineering and construction firm URS Corporation is investing $6.5 million for a Nuclear Center in Fort Mill, S.C. URS works closely with Duke Power, which has promoted new nuclear power and coal-fired plants in its growth strategy.
But with coal providing half of domestic electricity, the implications for stalled projects will be felt first. Richard Rudden, Black & Veatch senior vice president and energy industry lead, said most coal projects have been delayed as people grapple with the carbon issue. "Most construction now still is natural gas combined cycle."
The cancellation of coal plants has been felt most acutely in projects that were recently planned but then killed in the past year or two. According to Rudden, new capacity to committed generation is 4 percent to coal; 26 percent combin ed cycle natural gas; 22 percent renewable; 6 percent single cycle; and 2 percent landfill gas.
In current planning for new renewable energy, 64 percent of that is in wind. But surprisingly 27 percent is in hydropower, much of that in Canada, 5 percent solar, 2 percent geothermal and 1 percent biomass -- all of which requires transmission capacity that is now lacking.
Rising construction costs are also likely to inhibit future growth. According to the Power Capital Costs and Cambridge Energy Research Associates, the cost of new power plant construction in North America increased 27 percent in the 12 months preceding the February report and 19 percent in the previous six months, reaching a level 130 percent higher than in 2000. Rising commodity prices, particularly for construction materials, bear much of the responsibility.
The credit crisis is also expected to have an impact, as financing projects becomes more difficult and costly. Meanwhile, carbon mitigation, through either a cap-and-trade system or a tax, is expected by nearly everyone to become law within the next few years.
Despite all these hazards, utilities will be under pressure to increase capacity. "There will be a slowing in the increase, not an overall decline," said Black & Veatch's Rudden. Economic conditions may be cyclical. But the demand for power will by all accounts continue to rise.
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