Declining energy prices extend to electricity

After years of steep increases, costs to build power plants and transmission lines have started to fall, promising to temper electricity rate increases for consumers, according to a report out Wednesday.

The development is notable because the nation is poised to build the biggest wave of plants in a generation to meet rising electricity demand, and capital costs make up 50% of utility rates, says Larry Makovich, a managing director of Cambridge Energy Research Associates. CERA conducted the study.

Construction costs have dipped 5% the past year and will likely drop an additional 7% to 10% next year, says Candida Scott, CERA's senior director of cost and technology. If the recession persists into 2010, further decreases are likely, she says.

Behind the trend are plunging costs for raw materials such as steel and copper amid the global economic slump. Steel prices have tumbled nearly 30% in recent months, offsetting a sharp run-up earlier this year, Scott says.

And as some utilities delay or cancel new plants, easing order backlogs, costs for equipment, labor, engineering and management are declining. While some utilities signed contracts for new generation at higher prices, others may wait for costs to fall.

Nuclear plants have benefited most, with costs dropping 12% the past year, largely because they saw the sharpest increases. Since 2006, reactor construction expenses have soared to about $7 billion from about $3 billion. A big reason: Reactor vessels are supplied by just a few manufacturers. No nuclear reactor has been completed since the 1990s, but several dozen are being planned.

Costs to build coal, wind and natural gas generators have risen slightly this year but recently have stabilized and are poised to fall, Scott says.

"We're seeing some softening in the labor market that's bringing costs down" for some plant-upgrade projects, says Jason Cuevas, spokesman for Southern Co., one of the largest utilities.

Consumers may be hard-pressed to notice any savings because power plant construction costs still have more than doubled since 2000, CERA says. A $1 billion plant in 2000 now costs $2.24 billion.

Utility bills will likely increase 10% to 15% the next few years just to finance the new construction, Makovich says. But if expenses did not moderate, rates likely would jump about 20%, he says.

After figuring in fuel cost increases, especially for coal, electricity bills likely will rise as much as 35% the next five years or so, Makovich says. Further increases are expected when Congress imposes fees on utilities' global-warming emissions. The recession should provide a brief reprieve. With natural gas prices falling and some utilities delaying projects, rates are dropping in some areas and should be fairly stable most of next year, Makovich says.