Energy is Pricey—But So Is Building More Power Plants

Costs have skyrocketed in just a year, and Wall Street thinks they are headed even higher.

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So far, the pain of rising energy costs has been visible mostly at the gas pump and not in the electricity bill. But that is bound to change—unless we find a way to use a lot less power—due to the skyrocketing cost of building new power plants.

A new study by Cambridge Energy Research Associates shows that the cost of new power plant construction in North America increased 27 percent in just the last year and is 130 percent higher than in 2000. A plant that would have cost $1 billion in 2000, in other words, would cost $2.31 billion today. What's driving those costs is essentially the same thing driving the high cost of gasoline—demand in Asia. That demand is ratcheting up the cost of raw material, equipment, and engineering talent ever higher. CERA said the trend is especially marked in nuclear power construction—if you don't include nuke plants, power construction costs have risen 79 percent since 2000.

"These costs are beginning to act as a drag on the power industry's ability to expand to meet growing North American demand and leading to delays and postponements in the building of new power plants," said Candida Scott, lead researcher for the CERA project, called the Capital Costs Analysis Forum for Power.

No surprises there. In just the last month, at least two high-profile power project were deep-sixed.

MidAmerican Energy Holdings, owned by Warren Buffett's Berkshire Hathaway, pulled the plug on its planned nuclear power plant in Idaho, saying "the present economics of building the next generation of nuclear power plants are not in our customers' best interests."

And the U.S. Department of Energy withdrew from a big "clean coal" demonstration plant in Matoon, Ill., called FutureGen, after costs doubled to nearly $1.8 billion, 70 percent of which would have been taxpayer-paid. Technically, the department didn't kill the project, which was to demonstrate that greenhouse gas emissions could be captured and stored underground. Instead, it budgeted a smaller sum, $241 million, for the gas-capture technology at several smaller commercial power plants. The bill for the plants themselves would be in the hands of the power industry. And that means the whole thing is up in the air.

Lester Brown, of Earth Policy Institute, today said that his group has counted 59 coal plants that have either been refused licenses or have been withdrawn due to inability to get financing—nearly 40 percent of the 151 proposed coal power plants that a Department of Energy report less than a year ago pointed to as an indicator of the resurgence of "the most economic and abundant" fuel.

Coal may be cheap, but building the apparatus for turning it into electricity is not. And it's bound to get even more expensive as Wall Street banks Citigroup, JPMorgan Chase, and Morgan Stanley acknowledged by adopting a set of "carbon principles," meaning they will address the risks of greenhouse gas emissions in future financing decisions. Bank of America also this week said it would start factoring carbon-dioxide emissions costs into decisions about underwriting coal-fired power plant debt.

Once new power plants get built, these huge and growing costs of construction surely will be passed along to ratepayers. Plenty of folks, worried about climate change as well as cost, say we should head off the construction of plants altogether. But that won't happen as long as the country's electricity demand keeps growing as it is on pace to do, 1 to 2 percent each year.