Rising demand for power in developing countries combined with concerns about carbon emissions from coal-fired power plants in developed countries have created a bonanza for carbon-light technologies including nuclear, renewables and natural gas plants. This, in turn, has put upward pressure on price of natural gas in key markets while resulting in shortages in critical components for building renewables and nuclear reactors. Globalization of the power industry means that pressures in one segment or one region translate into shortages and rising prices everywhere else.
A case in point is carbon-free nuclear power, now enjoying a strong revival after years of dormancy, with significant investments in the US, the UK, China, India, Russia and a number of other major markets expected into building a new generation of reactors. The investors and developers, however, confront a host of shortages and obstacles beyond the usual stringent permitting and licensing issues.
Only a handful of companies are capable of manufacturing the highly specialized components of reactors and pressurized vessels – and as orders pile up, the waiting list for deliveries are getting longer. Japan Steel Works Ltd. for example, is one of few places making heavy steel forgings that go into nuclear plants. Chinese manufacturers are trying to find their way into every profitable niche, but that may take some time and require acquiring specialized skills. With plans to build as many as 50 new reactors by 2020, China offers a big market for nuclear manufacturers but could also create bottlenecks in the supply chain.
Shortages of skilled engineers, pipe fitters and welders are also cause for concern as there are a finite number of them to go around. With a growing number of US utilities lining up to build nuclear power plants, experts reckon completion times would stretch from 2015 to 2020, and that assumes no major regulatory or licensing hurdles.
In an interview with The Wall Street Journal (11 Apr 08), Dale Klein, the Chairman of the Nuclear Regulatory Commission (NRC) expressed concerns about the supply chain, especially now that a literal flood of applications for new nuclear plants are being submitted to NRC. He said, “The global supply chain is stretched, if not to the breaking point, at least to the tipping point.”
Referring to the membership of the American Nuclear Society, a key professional association, he pointed out that in 1977, 1350 American companies were represented. Today, that number is down to 700 – and many of them are foreign-owned. What this means is that many of the critical parts and components are increasingly manufactured outside the US, with little NRC oversight or quality control.
Globalization of wind Largest global wind markets
Source: The Wall Street Journal, 18 Apr 08 based on data from BTM Consult ApS
Renewable energy technologies, principally wind and solar, are also enjoying a phenomenal global building boom but also running into similar bottlenecks for critical components including wind turbine blades, solar modules and collectors. (See related article in this issue).
Conventional coal, currently facing strong opposition in the US and some European countries, has become a non-starter, abandoned by a number of developers who consider it an uphill battle with uncertain prospects given significant uncertainties about future carbon constraints. The short-term void is being filled by natural gas in many cases at a time when supplies are stretched and prices are rising.
US power sector demand for natural gas grew 10% in the last year alone, according to the Energy Information Administration (EIA) with domestic production flat. Experts have differing opinions, but many project a widening gap between domestic production and consumption, perhaps as much as 20 billion cubic feet by 2025. That gap is expected to be filled by liquefied natural gas (LNG) imports.
But US is not alone in growing reliance on imported LNG. Once a limited market with a few sellers and buyers, the LNG business has grown into a global commodity with a fleet of specialized LNG cargo ships transporting gas from any shipping to any receiving terminal – the destination determined by the highest bidder.
With major swings in demand due to regional droughts, cold or hot spells or variations in inventory levels, natural gas prices have become volatile, making them susceptible to frequent price spikes with little predictability. Long-term contracts, of course, are one way to get around the price swings but that carries an insurance premium not everyone is willing to pay.
Another driver putting upward pressure on prices is the booming economies of developing countries, notably China, India, but also others in the Middle East, Africa and Asia. China and India combined are sucking up a significant percentage of world-wide supply of power plant equipment components, not to mention primary fuels and commodities. In 2006, China reportedly built some 90 GW of new capacity, mostly coal. India, facing chronic power shortages, has announced plans to add 22 GW of new capacity in the next 5 years followed by another 70 GW in the following 5 years.
Since there are a limited number of suppliers serving the global market, bottlenecks have appeared prolonging waiting times for deliveries of critical components and parts. Developers are already complaining about significant delays in construction times for power plants. A relatively trivial combined cycle plant that would have taken a mere 2 years to build now takes 3 or longer and costs substantially more.
Rising Utility Construction Costs, a September 2007 report by the Brattle Group for the Edison Electric Institute (EEI), documents recent increases in raw material and commodity costs, such as steel and cement. Copper wires, for example, have quadrupled in price in the recent past, assuming you can get what you need. The EEI study points out to a “growing backlog of project contracts at large engineering, procurement and construction (EPC) firms and speculates that future bids may be less cost competitive as “new construction projects are added to the queue.”
Indices are all pointing upward National avg. utility infrastructure cost indices, 1991-2007, 1991 = 100
Source: Transforming America’s Power Industry, the Brattle Group, Edison Foundation Conference, 21 Apr 08
Cost of steam generation plants, transmission and distribution rose by 25-35% between Jan 2004-07; gas turbine prices rose 17% in 2006 alone, according to the same study. The impact on based load units such as coal or nuclear plants? Add $20/MWh to projections. And that is based on data up to 2007. One can only speculate that things have gotten worse since.
This post is extracted from EEnergy Informer, May 2008 issue.