Managing Power Costs
June 30th, 2011 by Megan Howard

Issues largely outside the direct control of your utility will affect your electric bill in the years to come

Underground conduits are laid in place to carry 480 volts of power to electrical motors during the 2005 expansion of Golden Valley Electric Association's gas plant in North Pole, Alaska. Photo by Andrew Johnson/AlaskaPhotoGraphics.com

Underground conduits are laid in place to carry 480 volts of power to electrical motors during the 2005 expansion of Golden Valley Electric Association’s gas plant in North Pole, Alaska. Photo by Andrew Johnson/AlaskaPhotoGraphics.com

After two years of declines, the price tag for building power plants and buying utility equipment has begun to climb again—and an improving world economy and hikes in costs for skilled labor, fuel and raw materials are driving expenses up.

These higher prices likely will affect your electric bill over the long term.

Electric utilities have an obligation to keep the lights on and electric bills affordable at a time when costs for components needed to construct generation, upgrade existing power plants, expand transmission facilities and modernize distribution systems are steadily rising.

“Combined with the costs of complying with new regulations, these pressures will affect electric bills in years to come—all of which are largely beyond the control of local co-ops,” says Glenn English, CEO of the National Rural Electric Cooperative Association.

Keeping the Lights On
The North American Electric Reliability Corp., the nation’s bulk power grid watchdog, estimates the United States will need to build 135,000 megawatts of new generation by 2017 to meet demand. However, facilities on the drawing board will deliver only 77,000 MW.

Electric co-ops—experiencing average annual load growth well above levels of other electric utilities—estimate they will need to bring about 12,000 MW of new generation on line during the next decade.

“This generation will be the most expensive in history, coming at a time when construction materials like steel, copper and concrete are shooting upward,” English says.

In the past 20 years, nations in Asia, Eastern Europe and the Middle East have transformed themselves into economic “tigers”—particularly in the areas of manufacturing, tourism, information technology and financial services. Flush with cash, they have embarked on unprecedented construction binges, erecting thousands of power plants, factories, residential high-rises and office towers.

Projects of this scope commandeer vast amounts of basic resources, and engineering and skilled labor expertise—and push up prices for such things as oil, timber, steel, nickel and concrete.

Commodities Drive Up Plant Costs

On behalf of its Northwest distribution utilities, PNGC Power is developing the first commercial wave park on the West Coast. Ocean Power Technologies is scheduled to deploy the first buoy 21/2 miles off of the Oregon Coast later this year. Photo courtesy of Ocean Power Technologies

On behalf of its Northwest distribution utilities, PNGC Power is developing the first commercial wave park on the West Coast. Ocean Power Technologies is scheduled to deploy the first buoy 21/2 miles off of the Oregon Coast later this year. Photo courtesy of Ocean Power Technologies

After a brief downturn due to the global recession, worldwide commodity prices have rebounded. Steel soared 42 percent between 2009 and 2010, while copper—used for wire and to ground electrical equipment—topped record highs of $4.50 a pound earlier this year.

Overall, nationally, costs for new coal-fired and nuclear power plants jumped 25 percent and 37 percent, respectively, according to the U.S. Energy Information Administration. Capital costs for a pulverized coal plant average more than $2,800 per kilowatt, while a nuclear plant runs about $5,300 per kW.

Wind generation capital costs increased about 21 percent, to an average $2,400 per kW for land-based wind farms and 50 percent, to $5,975 per kW, for turbines placed offshore. Geothermal power plants jumped 50 percent, to $4,140 per kW.

Costs for solar power dropped. Building photovoltaic arrays—which convert sunlight directly to electricity—decreased 25 percent, to roughly $4,755 per kW.

Both wind and solar require backup power from coal or natural gas to be available when the wind isn’t blowing and the sun isn’t shining. Natural gas-fired power plants—both peaking units that operate only when electric consumption crests and baseload (full time) facilities—currently boast the most stable costs, ranging from $665 per kW for an advanced combustion turbine to $2,000 for an advanced combined cycle plant.

Because combustion turbines and other natural gas generation equipment is manufactured in a factory and assembled on-site—rather than being built from the ground up, such as a coal or nuclear plant—total costs and time needed to get a plant operating generally are lower.

The bottom line? A portfolio of power plants that cost $100 billion to build in 2000 would cost about $215 billion today.

Dealing With Rising Expenses
For most publicly owned utilities, the single biggest expense involves buying power. Wholesale power purchases can account for as much as 75 percent of a utility’s budget, meaning pressures on generation costs affect electric rates.

But costs for basic operations—everything from replacing poles and wire to maintaining rights of way and fueling line trucks—also continue to escalate.

Looming government regulations also pose a threat. The U.S. Environmental Protection Agency is considering four major rules that could become game-changers for electric utilities: on cooling water intake, coal ash disposal, interstate transport of air pollutants and using the best available technology to curb emissions from power plants.

The agency also has begun regulating greenhouse gases from new and modified large stationary sources—including coal and natural gas power plants—under the federal Clean Air Act. Most of these EPA regulations are due to court-imposed decisions and deadlines.

“It’s entirely possible tighter emissions standards and other rules will have a multibillion dollar impact on the cost of doing business for electric co-ops,” says Kirk Johnson, NRECA senior vice president of government relations.

In Washington, D.C., in May, co-op leaders called for more certainty on how electricity generation will be regulated.

“Co-ops need Congress’ help to break out of the planning gridlock and set the rules for power generation today and in decades to come,” says English. “Not knowing the rules is costing us valuable time and delaying critical decisions.

“Until the government provides more certainty, electric cooperatives—along with the rest of the utility industry—are hamstrung in making informed decisions to provide generation and reliable power for our future.”

Magen Howard writes on consumer and cooperative affairs for NRECA. Megan McKoy-Noe contributed to this article.